As filed with the Securities and Exchange Commission on July 29, 2010
Registration No: 333-__________

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
___________

FORM S-1

REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
___________

CITIZENS BANCORP
(exact name of registrant as specified in its charter)


California	6022	01-0775317
(State or other jurisdiction of	(Primary Standard	(I.R.S. Employer
incorporation or organization)	Industrial Classification Code)	Identification No.)

208 Providence Mine Road Suite 122
Nevada City, California 95959
(530) 478-6000

(Address, including zip code and telephone number,
including area code, of registrant’s principal and executive offices)

Gary D. Gall
Citizens Bancorp
President and Chief Executive Officer
208 Providence Mine Road Suite 122
Nevada City, California 95959
(530) 478-6000

(Name, address, including zip code, and telephone number,
including area code, of agent for service)
___________

Copies to:

John F. Stuart, Esq.
Stuart | Moore
641 Higuera Street
Suite 302
San Luis Obispo, CA 93401
(805) 545-8590
(805) 545-8599 - facsimile

Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date of this Registration Statement.
___________

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. o

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.


Large accelerated filer o		Accelerated Filer o
Non-accelerated filer o	(Do not check if a smaller reporting company)	Smaller reporting company þ

CALCULATION OF REGISTRATION FEE


Title of Securities to be Registered	Proposed Maximum Aggregate Offering Price (1)			Amount of Registration Fee

6,666,667 Units, each unit consisting of:	$	20,000,000		$	1,426

One share of common stock, no par value		—			— (3	)

One warrant to purchase one share of common stock		—			— (3	)

Shares of common stock issuable upon exercise of warrants included in the units, and upon exercise of the representative’s warrants	$	33,333,335(2	)	$	2,377

TOTAL	$	53,333,335		$	3,803


(1)	Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended.
(2)	Determined in accordance with Rule 457(i) based upon the estimated exercise price of the warrants.
(3)	No fee required pursuant to Rule 457(g).

The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

___________

The information contained in this prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer to sell these securities and we are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

SUBJECT TO COMPLETION, DATED July 29, 2010

PRELIMINARY PROSPECTUS

(MESSAGE)

6,666,667 Units
Each Unit Consisting of One (1) Share of Common Stock
And A Variable Number of Warrants Depending on the Number of Units
Purchased by A Particular Investor as Fully Described Herein
$3.00 Per Unit

Citizens Bancorp is offering up to 6,666,667 units at a price of $3.00 per unit, with each unit consisting of one (1) share of common stock and a variable number of warrants (all warrants collectively, the “2010 Warrants”), each warrant to purchase one (1) share of our common stock, as more fully described herein. We will receive all of the net proceeds from the sale of these units. Our common stock is not listed on any national securities exchange. Our common stock is quoted on the Over the Counter Bulletin Board (“OTCBB”) under the symbol “CZNB” but is infrequently traded. The last reported sale price of our common stock was $[*] per share on [*], 2010. We do not intend to have the 2010 Warrants listed on any national securities exchange, nor do we intend to facilitate the quotation of the 2010 Warrants on the OTCBB, or any other securities quotation system.

Investing in our securities involves risks. See “Risk Factors” beginning on page 20 for a discussion of factors you should consider before buying our securities. You should not purchase these units if you cannot afford the loss of your investment.

The securities offered hereby are not savings accounts, deposits or other obligations of our bank subsidiary and are not insured by the Federal Deposit Insurance Corporation or any other government agency.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.

We reserve the right to withdraw, cancel or modify this Offering and reject subscriptions in whole or in part. It is expected that delivery of the shares will be made in Nevada City, California no later than [*], 2010.

The date of this prospectus is [*], 2010.

TABLE OF CONTENTS


	Page
Summary	5
Selected Consolidated Financial Information	19
Risk Factors	20
Cautionary Note Regarding Forward-Looking Statements	35
Use of Proceeds	37
Trading History and Dividend Policy	37
Capitalization	38
Dilution	40
Management’s Discussion and Analysis of Financial Condition and Results of Operations	41
Business	82
Supervision and Regulation	92
Management	103
Principal Shareholders	112
Description of Capital Stock	114
The Offering	120
Consent	121
Certain Legal Matters	121
Available Information	121
Index to Financial Statements	122

You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or any sale of our common stock. Our business, financial condition, results of operations and prospects may have changed since that date.

Information contained on our website is not part of this prospectus.

SUMMARY

This is only a summary and does not contain all the information that you should consider before investing in our common stock. You should read the entire prospectus, including “Risk Factors” and our consolidated financial statements and related notes appearing elsewhere in this prospectus, before deciding to invest in our common stock.

Unless we indicate otherwise, the number of shares as well as all per share and financial information in this prospectus:


	•	assumes an offering price of $3.00 per unit; and

	•	does not give effect to the use of proceeds of the Offering.

CITIZENS BANCORP

We are the bank holding company for Citizens Bank of Northern California (also referred to as “Citizens Bank” or “Bank”), a California chartered bank. At March 31, 2010, we had total assets of $338.4 million, total net loans of $283.0 million, total deposits of $283.6 million and shareholders’ equity of $9.9 million.

Citizens Bancorp (also referred to as “Company”) was organized as a California corporation and incorporated on February 19, 2003. Effective as of June 1, 2003, Citizens Bancorp became a bank holding company by acquiring all of the outstanding common stock of the Bank.

At this time, Citizens Bancorp functions primarily as the holder of all of Citizens Bank common stock. It may, in the future, acquire or form additional subsidiaries, including other banks to the extent permitted by law, although Citizens Bancorp has no plans to do so in the immediate future. Citizens Bancorp does not own or lease any property and has no paid employees; however, it shares the facilities and employees of Citizens Bank.

The principal office of Citizens Bancorp is 208 Providence Mine Rd., Suite 122, Nevada City, California 95959, and the telephone number is (530) 478-6000. Our common stock is traded on the Over-the-Counter Bulletin Board (“OTCBB”) under the symbol “CZNB”.

CITIZENS BANK

Citizens Bank was formed in 1994 and headquartered in Nevada City, California. Citizens Bank has six branches in communities in Nevada County, including Nevada City, Penn Valley, Lake of the Pines, Truckee, and two branches in Grass Valley. In addition the Bank has one branch in Placer County in the city of Auburn. We are the only community bank headquartered in Nevada County, California. We deliver a complete array of commercial bank products and services with an emphasis on customer relationships and personalized service.

Citizens Bank provides community banking services in its market areas offering a wide variety of deposit products, commercial, residential and consumer loans and other traditional banking products and services that are designed to meet the needs of small and middle market businesses and individuals. As a full service community bank, Citizens Bank seeks to differentiate itself from its competitors through superior personal service, responsiveness and local decision-making.

Our customers are generally small- to medium-sized businesses (generally representing businesses with less than $25 million in annual revenues) that require highly personalized commercial banking products and services that we deliver in our relationship banking style. We believe that our customers prefer locally owned and managed banking institutions that provide responsive, personalized service and customized products. In 2009, for the 11th year in a row, the quality of our service was voted “Best in Nevada County” by the readers of The Union newspaper. A substantial portion of our business is with customers who have long-standing relationships with our officers or directors or who have been referred to us by existing customers.

The Bank’s solid core banking operation is driven by a strong net interest margin that ranks in the top quartile of banks both in the State and nationally. Since its inception, the Bank has built a loyal customer base and continues to increase its market share. In addition, we have a dedicated board of directors and management team, who are committed to enhancing shareholder value and continuing to provide a positive customer experience. Our Board members have businesses located in Nevada County. Our committed employees strive to make a real difference in the community and currently volunteer in 81 local organizations, sit on 31 boards of directors and contribute to 66 organizations.

The Bank’s headquarters is located at our Nevada City branch at 305 Railroad Avenue, Nevada City, California 95959 and our telephone number is (530) 478-6000. The Bank’s Operations Center is located at 208 Providence Mine Road, Suite 122, Nevada City, California 95959. We maintain a website at www.citizensbanknc.com. None of the information on such website is deemed to be incorporated herein.

EVENTS OF 2008 AND 2009

In 2008 and 2009, we suffered losses of $10.7 million and $13.5 million, respectively. These losses were primarily the result of:


	•	a major economic recession in our market area, California and the nation which resulted in decreasing real estate values and significant unemployment;

	•	a concentration in land and construction loans;

	•	a circumvention of certain policies and procedures within the loan administration function; and

	•	the need for a valuation reserve on our deferred tax assets.

The confluence of these circumstances led us to a restatement of our 2008 financial statements after an examination by the California Department of Financial Institutions (“DFI”) in May of 2009 and a significant change in our senior management team. In 2009, because of the accumulative deficit position of the Company, a valuation allowance of $9.3 million was recorded against all of the Company’s net deferred tax assets.

STRENGTHS

Since 1995, we have served a key role in funding the economic engine in the markets we serve, working hand-in-hand to support local businesses. We have a strong branch system that has continued to grow our customer base. Despite the losses in 2008, 2009 and the first half of 2010, which resulted from significant provisions for credit losses and expenses/losses related to other real estate owned (“OREO”), the Company has significant core operating strengths, including a strong net interest margin and a very loyal customer base. We have continuously maintained a net interest margin that is among the top quartile of banks both in California and nationally. Our net interest margin was 4.54%, 4.51% and 4.61% for the quarter ended March 31, 2010 and the years ended December 31, 2009 and 2008, respectively.

We feel that these core strengths are an important measure as they show the effects of the Company’s core operations and do not change significantly as a result of outside economic influences. We believe that with an improved economy, we will record significantly smaller provisions for credit losses and will have significantly reduced OREO expenses.

We have a well-seasoned management team, with over 130 years of experience combined, who have the skills needed to return the Company to profitability. The Company’s performance trends are positive with the provision for credit losses decreasing 53% in 2009 from 2008 levels and are expected to decrease again in 2010.

OUR MANAGEMENT TEAM

The Board of Directors during 2009 replaced two executive officers and added a Chief Risk Officer. This newly assembled, experienced group of executives are charged with leading the Company and the Bank back to profitability. The executive management team consists of the following individuals:

•

Gary D. Gall joined the organization as our President and Chief Executive Officer and Director in July 2009. Mr. Gall’s 36 year banking career has been devoted to community banking and the long sustaining value it brings to local businesses, individuals and the community. His career includes his former role as President/Chief Executive Officer of Western Sierra Bancorp. During his tenure at Western Sierra, he led a dedicated team that grew assets from $50 million with four branches to over $1.2 billion and 31 branches within a multi-bank holding company environment. Under his leadership, the bank successfully negotiated and completed the merger/acquisition of six other community banks between 1999 and 2005. Western Sierra, who joined NASDAQ in 1999, was also recognized nationally for performing in the top 5% of community banks in 2004.


•	*Susann C. Trevena* has served as our Executive Vice President and Chief Financial Officer since 2002. Ms. Trevena’s 41 year career includes positions most recently as Vice President for Boston Private Bank & Trust company and preceding that, as Senior Vice President and Chief Financial Officer for Bank of Los Altos.

•	*Michael A. Behn* has served as our Executive Vice President/Chief Information Officer since 2004. In addition, in 2009 he was named the Bank’s Senior Credit Administrator. Mr. Behn’s 30 year career includes positions with Bank of America, United California Bank/First Interstate Bank of California, Manufacturers Bank and City National Bank.

•	*Phillip J. Campbell* joined the organization as our Executive Vice President/General Counsel and Chief Risk Officer in August 2009. Mr. Campbell’s 30 year career has focused on financial institutions. His career includes his former role as Chief Counsel for the Wachovia Small Business Capital subsidiaries of Wachovia Corporation and Wachovia Bank, N.A., and Assistant General Counsel with Wachovia Corporation and Wells Fargo & Co. He also was a partner at the law firm of Weintraub, Genshlea & Chediak.

MANAGEMENT RESPONSES

Under Mr. Gall’s leadership, the reconstituted executive management team and the Board of Directors have taken a number of proactive steps to stabilize the Bank and reduce losses. These steps have included:


•	completing a comprehensive review of the loan portfolio;

•	reorganizing the credit administration and underwriting functions, including internal control enhancement;

•	hiring a number of new senior officers;

•	increasing equity capital by almost $1.7 million through the private placement of Company common stock;

•	planning a reduction in assets of approximately $50 million in 2010 in order to reduce balance sheet risk and support regulatory capital ratios;

•	assigning Mr. Campbell as Chief Risk Officer and Mr. Behn as Senior Credit Administrator;

•	maintaining a net interest margin within the 90^th percentile of all insured commercial banks with assets between $300 million and $1.0 billion;

•	changing the funding mix by reducing brokered deposits and focusing on building core deposits;


•	becoming more efficient by centralizing operations and reducing non-interest expense;

•	initiating an SBA department to diversify the loan portfolio, reduce risk and generate fee income; and

MAJOR CHALLENGES

Despite the foregoing efforts and accomplishments, the Board of Directors and management are faced with several major challenges in the short run in attempting to overcome the events of 2008, 2009 and 2010. These major challenges include:

Recapitalization

Our capital has been significantly reduced as a result of the losses in 2008 and 2009 and a $4.5 million loss in the first six months of 2010. We must now recapitalize the Company and the Bank. We entered into an agreement with our regulators to raise the Bank’s leverage capital ratio to 9% by the middle of July. Although we have not met this deadline, we are continuing our efforts to raise the capital needed to reach the capital ratio required in the agreement. As of June 30, 2010, we needed to achieve a combination of new equity capital and earnings of $11.2 million in order to satisfy the capital requirement. See “Consent Order and Written Agreement.” To achieve such a ratio, we must:


	•	increase the Bank’s capital through a combination of new equity capital and its earnings;

	•	reduce assets from the amount at year end 2009; and

	•	minimize future losses from the $29.9 million in non-performing loans we had at June 30, 2010 or from other assets.

If we do not achieve all these goals, we will not be able to satisfy the capital requirement of the consent order which would have a material adverse effect on the Company and the Bank and the value of your investment and our ability to continue as a going concern. See “Other Recent Events,” “Risk Factors,” “Business - Supervision and Regulation – Capital Standards” and – “Prompt Corrective Action and Other Enforcement Mechanisms.”

We view satisfying the capital requirements of the Order as only the first step in our recapitalization. We anticipate that further capital will be necessary in order to (i) execute our growth strategy once our financial position improves and (ii) keep us in compliance with the Order. The economic recession has provided a number of opportunities for expansion for a well-capitalized institution which is in satisfactory regulatory condition.

Consent Order and Written Agreement

The DFI completed its regularly scheduled examination of the Bank in May, 2009. As a result of such examination, effective February 11, 2010, the Bank entered into a stipulation and consent to issuance of a consent order (the “Order”) by the FDIC and DFI.


	The Order requires the Bank to:

•	take various steps to ensure that competent management is in place;

•	within 150 days of the effective date of the Order and thereafter, achieve and maintain tangible shareholder’s equity to total tangible assets, and Tier 1 capital to total assets, equal to or greater than 9% (the “Capital Requirement”);

•	develop, adopt and implement a Capital Plan setting forth specific actions that the Bank will take to satisfy the Capital Requirement;

•	take various steps to improve Bank’s asset quality including reducing classified assets to certain levels within given time-frames, providing for an adequate provision for loan losses on a quarterly basis and adopting changes to lending policies and procedures;

•	formulate and implement a written plan and a comprehensive budget for all categories of income and expense to improve and sustain Bank’s earnings;

•	not establish any new branches or other offices except with the prior written approval of the FDIC and DFI during the life of the Order;

•	adopt and implement a written contingency liquidity policy which sets forth alternate courses of action to be taken in response to possible adverse liquidity events;

•	not make any distribution of dividends to the Bank’s shareholder except with the prior written approval of the FDIC and DFI during the life of the Order;

•	comply with the applicable FDIC rules and regulations regarding brokered deposits during the life of the Order;

•	take various steps to ensure compliance with Consumer Laws; and

•	furnish written progress reports to the authorities at FDIC and DFI to detail the form and manner of any actions taken to ensure compliance with the Order.

The Order will remain effective until amended, suspended or terminated by the FDIC and DFI. The Bank and its management have already undertaken multiple initiatives to comply with the terms of the Order, and will diligently continue such effort during the life of the Order.

On February 22, 2010 the Company entered into an agreement with the Federal Reserve Board (the “Federal Reserve Agreement”) to maintain the financial soundness of the Company so that the Company may serve as a source of strength to the Bank.


	In the Federal Reserve Agreement, the Company agreed that:

•	the Board of Directors of the Company shall take appropriate steps to fully utilize the Company’s financial and managerial resources, and to ensure that the Bank complies with the Order entered into with the FDIC and the DFI and any other supervisory action taken by the Bank’s federal or state regulators;

•	the Company shall not declare or pay any dividends nor make any distribution of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Board;

•	the Company and its nonbank subsidiaries, if any, shall not, directly or indirectly incur, increase or guarantee any debt, nor shall the Company directly or indirectly, purchase or redeem any shares of its stock without the prior approval of the Federal Reserve Board;

•	the Company shall comply with certain notice provisions under the applicable federal rules and regulations to notify the Federal Reserve Board in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position;

•	the Company shall comply with restrictions on indemnification and severance payments pursuant to the applicable federal laws and regulations; and

•	within 30 days after the end of each calendar quarter following the date of the Federal Reserve Agreement, the Board of Directors shall submit to the Federal Reserve Board written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Agreement and the result thereof, applicable financial data of the Company, and changes in shareholders’ equity.

The Federal Reserve Agreement will remain effective and enforceable until stayed, modified, terminated, or suspended in writing by the Federal Reserve Board. The Company and its management have already undertaken multiple initiatives to comply with the terms of the Federal Reserve Agreement, and will diligently continue such effort during the life of the Agreement.

The foregoing descriptions of the Order and the Federal Reserve Agreement are summaries and do not purport to be a complete description of all of the terms of such documents, and are qualified in their entirety by reference to the Order and the Federal Reserve Agreement.

Strengthen the Balance Sheet

loan sales, as appropriate. We expect that many of these assets will eventually require foreclosure and subsequent sale by the Bank. This will prove to be a detriment to our earnings since we will not be earning any interest on the non-performing asset, will also have the cost of carrying the property while awaiting sale, and may experience further losses if the value of such property declines, as discussed below.

We have completed reappraisals of the real property securing our non-performing and impaired loans and have marked these assets to their lower market values less costs to sell which contributed to our losses in 2008 and 2009 and the first six months of 2010. While we believe that our current loan loss reserve is adequate to absorb future losses based on these reappraisals, any further deterioration in real property values will lead to further losses and a decrease in capital.

Return to Profitability

It is essential that we return to profitability to support our long term growth in assets and shareholder value. If we are able to successfully manage our problem assets, management believes that there are several significant earnings drivers which will lead to sustained earnings growth and profitability. These drivers include:


•	a strong net interest margin of 4.51% at December 31, 2009 driven by our low cost of funds;

•	approximately $9.3 million in deferred tax assets to shelter future income from taxes, subject to certain limitations;

•	the opening of our SBA department to generate small business government guaranteed loans which can be retained for earnings or, when eligible, sold in the secondary market for a premium with the possibility of service fee income; and

•	an increase in operating efficiencies and cost reduction measures which should favorably impact non-interest expense.

OUR BUSINESS STRATEGY

Our long-term business strategy is to provide comprehensive banking and related services to small- to medium-sized businesses and their employees. The key elements of our strategy are as follows:


•	Maintain our emphasis on business banking

	Our focus on providing comprehensive banking services to small- to medium-sized businesses continues to help us grow our core non-interest bearing deposit base and maintain our strong net interest margin.


•	Increase market share

	Because Citizens Bank is the only community bank headquartered in Nevada County, we believe that there is significant potential to increase business with current customers, to attract new customers in our existing markets, and to position ourselves to enter new markets. Quality service, which is an integral part of our culture, and doing business locally, are reasons that the Bank’s customers prefer our locally-based organization.

•	Use technology to expand customer base

	While our strategy continues to emphasize superior personal service, we also take advantage of user-friendly technology-based systems to attract customers who may prefer to interact with their financial institution electronically. We offer technology-based services including voice response banking, debit cards, online banking, bill pay and cash management, remote deposit capture, ATMs and an internet website. We believe the availability of both traditional banking services and electronic banking services enhance our ability to attract a broader range of customers.

•	Maintain and recruit highly competent personnel

	We have developed a strong corporate culture that has allowed us to recruit and retain some of the best bankers in the Northern California market. We are committed to attracting, developing and retaining people who are significantly knowledgeable about the banking industry and passionate about the communities which we serve. Our compensation and benefits program is competitive. The individuals who comprise our executive management team have an average of thirty-four years of banking industry experience, and our business development and service personnel are well-respected, as well as, very involved in our communities.

OTHER RECENT DEVELOPMENTS

2009 Private Placement

On December 28, 2009, the Company completed a private placement whereby the Company raised $1,559,034 in connection with the sale of 394,109 shares of common stock at the price of $4.00 per share. Among the total shares sold, 46% or 181,609 shares were purchased by certain of Company’s directors, officers and their family members, 22% or 87,500 shares purchased by its former directors, and 32% or 125,000 shares purchased by two other outside investors. In addition, in April 2010, as a continuation of the private placement, we received an additional $100,000.

Increase in Authorized Shares

At the Company’s Annual Shareholder Meeting on May 18, 2010, a proposal was approved to amend the Company’s Articles of Incorporation to increase the authorized shares of

common and preferred stock from 5 million and 2.5 million shares, respectively, to 20 million and 5 million shares, respectively. The increase in the number of common shares is necessary to provide sufficient shares for the Offering and other capital raisings as well as maintain the number of authorized and unissued shares allocated to the 1995 stock option plan and the 2006 stock plan (collectively “stock plans”).

Events Subsequent to March 31, 2010 Unaudited Interim Financial Statements

The regulators completed a full examination of the Bank during June 2010. As a result of the exam, the regulators mandated a significant increase in the allowance for credit losses as set forth below. The regulators also refused to grant the Bank’s request for an extension of the July deadline to achieve the Capital Requirement of the Order.

The Company and the Bank believe that the regulators will take further enforcement action including the possible modification of the Order and the issuance of a prompt correction action directive.

In light of these circumstances, the board of directors has decided to proceed with the Offering. However, it will not close the Offering if new equity capital and earnings combined would not result in the Bank being in substantial compliance with the Capital Requirement of the Order.

The Company has evaluated the effects of subsequent events that have occurred subsequent to March 31, 2010 and through July 23, 2010, which is the date the financial statements were available to be issued. The following information is presented to provide additional information about significant changes to loans and the allowance for credit losses, other real estate owned and shareholders’ equity and regulatory capital for the three month period ended June 30, 2010:

Loans and the Allowance for Credit Losses

Changes in the allowance for credit losses for the three months ended June 30, 2010 were as follows:


Balance, April 1, 2010	$	13,560,926
Provision charged to operations		6,900,000
Net losses charged to allowance		(4,538,434	)


Balance, June 30, 2010	$	15,922,492

The recorded investment in loans that were considered to be impaired totaled $64,886,000 and $58,643,000 at June 30, 2010 and March 31, 2010, respectively. The related allowance for credit losses for impaired loans was $6,881,000 and $5,896,000 at June 30, 2010 and March 31, 2010, respectively.

At June 30, 2010 and March 31, 2010, nonaccrual loans totaled $27,026,000 and $31,147,000, respectively.

Other Real Estate

The Company’s investment in other real estate holdings, all of which were related to real estate acquired in full or partial settlement of loan obligations, was $5,471,524, net of a valuation allowance of $1,556,000 at June 30, 2010, compared to $4,552,762, net of a valuation allowance of $1,634,600 at March 31, 2010.

Shareholders’ Equity and Regulatory Capital

Shareholders’ equity at June 30, 2010 decreased to $5,118,000 from $9,875,000 at March 31, 2010 primarily due to a net loss of $4,542,000 for the three months ended June 30, 2010. The primary contributor to the Company’s loss for the three months ended June 30, 2010 was an increase in the provision for credit losses. This was offset by the reversal of liabilities totaling $1.3 million associated with certain retirement plans and deferred director fee agreements that were cancelled in June 2010.

The regulatory capital guidelines as well as the actual capital ratios for the Company and the Bank as of June 30, 2010 are as follows:


	CITIZENS BANCORP
	AND SUBSIDIARIES		CITIZENS BANK

				Minimum
				Regulatory
				Requirement
	Minimum	Actual	Minimum	for “Well	Actual
	Regulatory	Capital	Regulatory	Capitalized”	Capital
	Requirement	Ratio	Requirement	Institution	Ratio

Leverage Ratio	4.0%	2.0%	4.0% (1)	5.0%	5.7%

Tier 1 Risk-Based Ratio	4.0%	2.4%	4.0%	6.0%	6.8%

Total Risk-Based Ratio	8.0%	8.3%	8.0%	10.0%	8.1%

(1) The Order entered into by the Bank in February 2010, requires the Bank to maintain a Tier 1 capital to average assets (Leverage) ratio equal to or greater than 9% by July 2010. As noted above, we have not met the deadline for increasing the capital ratio; however, we continue our efforts to raise the capital needed to meet the Capital Requirements in the Order.

The Company’s recurring losses have resulted in significant deterioration to shareholders’ equity and regulatory capital. These recurring losses raise concern about the Company’s ability to continue as a going concern. Management is actively pursuing new ventures to increase revenues. In addition, the Company is currently seeking additional sources of capital, including

the Offering. The Company is dependent upon its ability to secure sufficient equity and there are no assurances that the Company will be successful.

THE OFFERING


Securities Offered	6,666,667 units, with each unit consisting of one (1) share of common stock and a variable number of 2010 Warrants, as described below. If all 6,666,667 units are sold, the gross proceeds would be $20.0 million assuming no 2010 Warrants are exercised, and $[].0 million assuming [] 2010 Warrants are issued, and all such 2010 Warrants are exercised.

Price per Unit	$3.00

Minimum Investment	$[*]

Description of the 2010 Warrants	The exercise price of each 2010 Warrant is $5.00. The 2010 Warrants are transferable separately from our common stock, and will be exercisable for a period of 3 or 7 years as set forth below.

Number and Specific Terms of Warrants	The number of 2010 Warrants per unit received by a particular investor, and the specific terms of those 2010 Warrants will be determined based on the following:


INVESTMENT	WARRANTS	EXERCISE	TERM
($3.00 / Unit)	(per share)	PRICE



$1,000,000 and above	1.00	$5.00	3 Years – 50% 7 Years – 50%

$500,000 to $999,999	.75	$5.00	3 Years – 50% 7 Years – 50%

$250,000 to $499,999	.50	$5.00	3 Years – 50% 7 Years – 50%

$100,000 to $249,999	.25	$5.00	3 Years – 50% 7 Years – 50%


Termination date	[*], 2010


Escrow	Subscription funds will be held in a separate escrow account by [*] and will only be released to the Company on the termination date if new equity capital and earnings combined would result in the Bank being in substantial compliance with the Capital Requirement of the Order. If the gross proceeds are less than necessary to satisfy this requirement, subscription funds will be returned to subscribers as soon as possible after the termination date without interest.

Use of proceeds	We intend to use all of the proceeds from the sale of the common stock to contribute to the Bank as additional capital in order to support its regulatory capital ratios. See “Consent Order and Written Agreement.”

Common Stock Outstanding	As of the date of this Prospectus, we have 2,335,090 shares of common stock outstanding. If all units are sold, we will have 9,001,757 shares outstanding, excluding the shares issuable upon exercise of the 2010 Warrants and any outstanding stock options. The number of shares of our common stock that will be outstanding after this Offering includes the 2,335,090 shares outstanding as of June 30, 2010, but excludes (i) 661,689 shares of common stock reserved for issuance under our stock option plans of which 67,082 shares were subject to outstanding options at June 30, 2010.

SELECTED CONSOLIDATED FINANCIAL INFORMATION

You should read the selected consolidated financial information set forth below in conjunction with our historical consolidated financial statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” included elsewhere in this prospectus. The consolidated financial statements include the accounts of Citizens Bancorp and its wholly owned subsidiary, the Bank. The statement of operations data for the years ended December 31, 2009, 2008 and 2007 and the financial condition data as of December 31, 2009 and 2008 have been derived from our audited financial statements included elsewhere in this prospectus. The statement of operations data for the year ended December 31, 2006 and 2005 and the financial condition data as of December 31, 2007, 2006 and 2005 have been derived from our audited financial statements that are not included in this prospectus.


(Dollars in thousands, except per share data)	At or For the Three Months Ended March 31,							At or For the Year Ended December 31,

Operations Data:	Unaudited

	2010			2009			2009			2008			2007			2006			2005

Net interest income	$	3,577		$	3,524		$	15,122		$	15,100		$	14,294		$	13,582		$	11,297
Provision for credit losses		600			2,000			11,115			23,900			945			560			845
Non-interest income		579			522			5,112			2,140			2,206			1,668			1,295
Non-interest expense		3,193			4,571			15,691			11,653			11,242			9,632			7,629

Income (loss) before income tax		363			(2,525	)		(6,572	)		(18,313	)		4,313			5,058			4,117
Income tax (benefit)		0			(1,020	)		6,568			(7,662	)		1,728			2,024			1,647

Net income (loss)		363			(1,505	)		(13,140	)		(10,651	)		2,585			3,034			2,470
Dividends/discount accretion on preferred stock		(26	)		(108	)		(328	)		—			—			—			—

Net income (loss) applicable to common shareholders	$	337			(1,613	)	$	(13,468	)	$	(10,651	)	$	2,585		$	3,034		$	2,470


Share Data (retroactively adjusted for 5% stock dividends paid in June 2008, 2007 and 2006):
Earnings (loss) per share - basic	$	0.15		$	(0.84	)	$	(7.01	)	$	(5.56	)	$	1.35		$	1.60		$	1.34
Earnings (loss) per share – diluted	$	0.15		$	(0.84	)	$	(7.01	)	$	(5.56	)	$	1.32		$	1.57		$	1.30
Book value per common share	$	(0.27	)	$	4.86		$	(0.42	)	$	5.70		$	11.28		$	9.87		$	8.19

Balance Sheet Data:
Assets	$	338,376		$	370,448		$	371,058		$	363,274		$	328,433		$	280,393		$	226,995
Loans		296,623			315,252			304,739			312,374			305,135			259,381			206,659
Allowance for credit losses		(13,561	)		(13,810	)		(14,387	)		(12,406	)		(3,919	)		(3,374	)		(2,825	)
Loans, net		283,062			301,442			290,352			299,968			301,216			256,007			203,834
Deposits		283,591			303,469			302,631			299,758			274,255			243,237			189,626
Junior subordinated debentures		15,465			15,465			15,465			15,465			15,465			15,465			9,279
Preferred stock		10,499			10,395			10,473			10,369			—			—			—
Common stock & retained (deficit) earnings		(624	)		9,314			(968	)		10,927			21,572			18,864			15,376
Total shareholders’ equity		9,875			19,709			9,505			21,296			21,572			18,864			15,376

Financial Ratios:
Return on average equity		14.09	%		(31.90%	)		(72.71%	)		(50.82%	)		12.77	%		17.67	%		16.51	%
Return on average assets		0.38	%		(1.78%	)		(3.58%	)		(3.04%	)		0.86	%		1.18	%		1.11	%
Efficiency ratio		76.84	%		112.96	%		77.55	%		67.60	%		68.14	%		63.16	%		60.59	%
Net interest margin		4.54	%		4.30	%		4.51	%		4.61	%		5.05	%		5.62	%		5.07	%
Loans to deposits		104.60	%		103.88	%		100.70	%		104.21	%		111.26	%		106.64	%		108.98	%
Net charge-offs to average loans		1.92	%		0.77	%		2.94	%		4.87	%		0.14	%		0.01	%		0.00	%
Non-performing loans to total loans		11.22	%		7.65	%		8.95	%		8.92	%		3.10	%		0.00	%		0.00	%
Non-performing loans to allowance for credit losses		245.36	%		174.73	%		189.60	%		224.49	%		241.75	%		0.00	%		0.00	%
Allowance for credit losses to total loans		4.57	%		4.38	%		4.72	%		3.97	%		1.28	%		1.30	%		1.37	%
Average equity to average assets		2.73	%		5.59	%		4.92	%		5.98	%		6.70	%		6.65	%		6.71	%

Consolidated Capital Ratios:
Leverage capital ratio		3.7	%		4.9	%		3.3	%		5.5	%		8.9	%		9.0	%		9.4	%
Total risk-based capital ratio		9.5	%		9.6	%		9.2	%		10.2	%		12.0	%		12.6	%		11.5	%
Tier 1 risk-based capital ratio		4.7	%		5.2	%		4.1	%		5.9	%		8.5	%		8.4	%		8.6	%

Bank-only Capital Ratios:
Leverage capital ratio		6.8	%		7.4	%		6.1	%		7.8	%		11.1	%		11.6	%		10.8	%
Total risk-based capital ratio		9.3	%		9.2	%		8.9	%		9.7	%		11.7	%		12.1	%		11.2	%
Tier 1 risk-based capital ratio		8.0	%		8.0	%		7.7	%		8.4	%		10.5	%		10.9	%		9.9	%

RISK FACTORS

An investment in our common stock is subject to various risks. Before making a decision about your investment, you should carefully consider the risks and uncertainties described below together with all of the other information included in this document. The risks and uncertainties described below are not the only ones facing our business. Additional risks and uncertainties that management is not aware of or focused on or that management currently deems immaterial may also impair our business operations. This document is qualified in its entirety by these risk factors. If any of the following risks actually occur, our financial condition and results of operations could be materially and adversely affected. If this were to happen, the value of our common stock could decline significantly, and you could lose all or part of the value of your investment.

Risks Related to the Offering

We are required to maintain capital to meet regulatory requirements in the Order, and if we fail to meet and maintain those capital requirements, whether due to losses, an inability to raise sufficient capital in the Offering or otherwise, our financial condition, liquidity and results of operations, as well as your investment, would be adversely affected.

We were required by our regulators to raise the Bank’s leverage capital ratio to 9% by the middle of July in order to comply with the Order. We were unable to achieve the capital ratio prior to the deadline. To achieve such a ratio, we must (i) increase the Bank’s capital through a combination of new equity capital and earnings, (ii) continue to reduce assets, and (iii) minimize further losses from the $29.9 million in non-performing loans we had at June 30, 2010 or from other assets. If we fail to achieve these goals, we will not be able to satisfy the Capital Requirement of the Order and this would have a material adverse effect on the Company and the Bank, including but not limited to additional regulatory enforcement actions such as, the imposition of civil monetary penalties against the Company, the Bank or both, the termination of insurance of the Bank’s deposits by the FDIC or the closing of the Bank with the imposition of a conservator or receiver.

Even if we satisfy the Capital Requirement of the Order, we will pursue various alternatives for additional capital in the future, which could dilute the holders of our outstanding common stock and may adversely affect the market price of our common stock.

In the current economic environment and with the need to recapitalize the Company beyond the amounts of new capital necessary to satisfy the Capital Requirement of the Order, we are constantly reviewing alternatives for raising capital in order to try to assure compliance with the Order, further strengthen our capital and better position us to take advantage of opportunities that may arise in the future. Such alternatives may include issuance and sale of additional common or preferred stock, additional trust preferred securities, or borrowings by us, with proceeds contributed to the Bank. Any such capital raising alternatives could dilute the holders of our outstanding common stock, including purchasers in this Offering, and may adversely affect the market price of our common stock. Our current plans to further recapitalize the Company are discussed at “Summary – Major Challenges – Recapitalization.”

The market price of our common stock after the Offering is uncertain.

The market price of our common stock on or after consummation of the Offering may not approximate the prices prior to the Offering. Stock price changes, whether before or after the Offering, may result from a variety of factors, including general market and economic conditions, changes in the respective businesses, operations and prospects and regulatory considerations.

Historically, only a limited market has existed for our common stock and the Offering may not substantially enhance the depth of such market, nor do we expect any significant market to develop for the 2010 Warrants.

Our common stock has been traded infrequently in the over-the-counter market and our trading volume has been very small. The limited trading market for our common stock can cause fluctuations in the market value of our common stock to be exaggerated, leading to price volatility in excess of that which would occur in a more active trading of our common stock. While the Offering may improve the level of trading of the common stock, no assurance can be given that such increase will substantially enhance the depth of such market nor will continue. We also do not expect a market to develop for the 2010 Warrants, which may impact your ability to sell any 2010 Warrants that you receive in the Offering.

Purchasers in this Offering will suffer substantial dilution since the offering price per share exceeds the book value per common share.

The book value of shareholders’ equity attributable to common shareholders as of March 31, 2010 was a negative $624,000, or $0.27 per common share. The book value per share of our common stock as of March 31, 2010, adjusted to give pro forma effect to the issuance of the maximum shares in the Offering would be approximately $[*]. Consequently, purchasers in the Offering will experience $[*] per share dilution relative to the $3.00 per share offering price.

The subscription price was determined arbitrarily.

The price per Unit was arbitrarily determined by the board of directors and is not necessarily related to book value, earnings or the long term prospects of the Company.

Risks Relating to Economic Conditions and Governmental Response Efforts

minimize further losses from the $29.9 million in non-performing loans we had at June 30, 2010 or from other assets. If we fail to achieve all these goals, we will not be able to satisfy the capital requirement of the Order which would have a material adverse effect on the Company and the Bank, including but not limited to additional regulatory enforcement actions such as, the imposition of civil monetary penalties against the Company, the Bank or both, the termination of insurance of the Bank’s deposits by the FDIC or the closing of the Bank with the imposition of a conservator or receiver.

The recession and changes in domestic and foreign financial markets have adversely affected our industry and may have a material negative impact on our results of operations and financial condition.

Economic indices have shown that since the fourth quarter of 2007, the United States economy has been in a recession. This has been reflected in significant business failures and job losses. Further, dramatic declines in the housing market, with decreasing home prices and increasing delinquencies and foreclosures, have negatively impacted the credit performance of mortgage and construction loans and resulted in significant write-downs of assets by many financial institutions. General downward economic trends, reduced availability of commercial credit and increased unemployment, have negatively impacted the performance of commercial and consumer credit, resulting in additional write-downs. Concerns over the stability of the financial markets and the economy have resulted in decreased lending by financial institutions to their customers and to each other. This market turmoil and tightening of credit has led to increased commercial and consumer delinquencies, lack of customer confidence, increased market volatility and widespread reduction in general business activity. Financial institutions have experienced decreased access to deposits and borrowings. The resulting economic pressure on consumers and businesses and the lack of confidence in the financial markets has adversely affected, and may continue to adversely affect, our business, financial condition, results of operations and stock price. We do not expect that the difficult conditions in the financial markets and in our own local market are likely to improve in the near future. A continuing of these conditions would exacerbate the adverse effects of these difficult market conditions on us and others in the financial institutions industry.

Recent and future legislation and regulatory initiatives to address current market and economic conditions may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy, which could adversely affect our business, financial condition, results of operations, and access to capital.

Recent and future legislative and regulatory initiatives to address current market and economic conditions, such as the Emergency Economic Stabilization Act of 2008 (“EESA”), or the American Recovery and Reinvestment Act of 2009 (“ARRA), may not achieve their intended objectives, including stabilizing the U.S. banking system or reviving the overall economy. EESA was enacted in October 2008 to restore confidence and stabilize the volatility in the U.S. banking system and to encourage financial institutions to increase their lending to customers and to each other. The United States Department of the Treasury (“Treasury”) and banking regulators have implemented, and likely will continue to implement, various other programs under this legislation to address capital and liquidity issues in the banking system, including the Troubled

Asset Relief Program (“TARP”), President Obama’s Financial Stability Plan announced in February 2009, the ARRA and the FDIC’s Temporary Liquidity Guaranty Program (“TLGP”). There can be no assurance as to the actual impact that any of the recent, or future, legislative and regulatory initiatives will have on the financial markets and the overall economy. Any failure of these initiatives to help stabilize or improve the financial markets and the economy, and a continuation or worsening of current financial market and economic conditions could materially and adversely affect our business, financial condition, results of operations, access to credit or the trading price of our common stock.

Additional requirements under our regulatory framework, especially those imposed under ARRA, EESA or other legislation intended to strengthen the U.S. financial system, could adversely affect us.

Recent government efforts to strengthen the U.S. financial system, including the implementation of ARRA, EESA, the TLGP and special assessments imposed by the FDIC, subject participants to additional regulatory fees and requirements, including corporate governance requirements, executive compensation restrictions, restrictions on declaring or paying dividends, restrictions on share repurchases, limits on executive compensation tax deductions and prohibitions against golden parachute payments. These requirements, and any other requirements that may be subsequently imposed, including those recently proposed by the Obama Administration, may have a material and adverse effect on our business, financial condition, and results of operations.

We are subject to various regulatory requirements and are subject to regulatory restrictions and enforcement actions that limit our business practices and may negatively impact our results of operation and financial condition.

In light of the current challenging operating environment, along with our elevated level of non-performing assets, delinquencies, and adversely classified assets, we are subject to increased regulatory scrutiny and enforcement actions. Such enforcement actions place limitations on our business and may adversely affect our ability to implement our business plans. See “Business – Consent Order and Written Agreement”

FDIC deposit insurance assessments will increase substantially, which will adversely affect our net earnings.

FDIC deposit insurance expense for the year ended December 31, 2009 was approximately $1.1 million. Our estimated assessment for the year ended December 31, 2010 is $1.2 million. Increases in our FDIC premium add to our cost of operations and accordingly, adversely affect our results of operations. In the quarter ended June 30, 2009, the Bank, along with all other FDIC insured banks, was charged a special assessment as part of the FDIC’s efforts to replenish the deposit insurance fund. The Bank’s special assessment was $177,000. Additionally, the FDIC is permitted to impose additional special assessments if necessary to maintain public confidence in federal deposit insurance or as a result of deterioration in the deposit insurance fund reserve ratio due to institution failures. Any additional special assessment imposed by the FDIC will further decrease our earnings.

Risks Related to Our Business and Market

A continued deterioration in economic conditions and a slow down in growth generally could adversely affect our business, financial condition, results of operations and prospects. Such deterioration could result in a variety of adverse consequences to us, including the following:


•		Loan delinquencies may increase, which may cause us to increase loan loss provisions, and also result in a reduction in net interest income and our earnings as well as weaken our balance sheet;

•		Problem assets and foreclosures may increase, which could result in higher operating expenses, and increases in our loan loss provisions;

•		Demand for our products and services may decline including specifically, the demand for loans, which would cause our revenues, which include net interest income and noninterest income, to decline; and

•		Collateral for loans may decline in value, reducing a customer’s borrowing power, and reducing the value of assets and collateral associated with our loans.

Recent levels of market volatility were unprecedented and we cannot predict whether or not they will return.

The capital and credit markets have been experiencing volatility and disruption for more than two years. In some cases, the markets have produced downward pressure on stock prices and credit availability for certain issuers without regard to those issuer’s underlying financial strength. This downward pressure on stock prices and reduced availability of capital has adversely impacted our ability to obtain the working capital we need at appropriate pricing to operate most effectively without unacceptable dilution to shareholders. If recent levels of market disruption and volatility continue or worsen, there can be no assurance that we will not experience an adverse effect, which may be material, on our ability to access capital and on our business, financial condition and results of operations.

The unseasoned nature of a large portion of our loan portfolio may result in changes in estimating collectability, which may lead to additional provisions or charge-offs and an adverse impact to our profits.

Our loan portfolio has increased approximately $100 million from the end of 2005 to the end of 2009. Accordingly, many of the loans in our portfolio are unseasoned. These loans also have not been subjected to declining and unfavorable economic conditions. As a result, it may be difficult to predict the future performance of these loans. These loans may have delinquencies or charge-off levels above our historical experience which could adversely effect our future performance.

Nonperforming assets take significant time to resolve and adversely affect our results of operations and financial condition.

At December 31, 2009 and March 31, 2010 our nonperforming loans (which consist of non-accrual loans and accruing loans 90 days or more past due) were $27.3 million and $33.3 million, respectively, constituting 9.0% and 11.2% of the loan portfolio, respectively. At December 31, 2009 and March 31, 2010, our nonperforming assets (which include foreclosed real estate), totaling $31.9 million and $37.7 million respectively, were 8.6% and 11.1% of total assets, respectively. Nonperforming assets adversely affect our net income in various ways. Until economic and market conditions improve, we expect to continue to incur additional losses relating to an increase in non-performing loans. We do not record interest income on non-accrual loans or other real estate owned, thereby adversely affecting our income, and increasing our loan administration costs. When we take collateral through foreclosures and similar proceedings, we are required to mark the related loan to the then fair market value of the collateral, which may result in a loss. These loans and other real estate owned also increase our risk profile and the capital levels determined by regulators to be appropriate in light of such risks. While we have tried to reduce our problem assets through workouts, restructurings and otherwise, decreases in the value of these assets, or the underlying collateral, or in these borrowers’ performance or financial conditions, whether or not due to economic and market conditions beyond our control, could adversely affect our business, results of operations and financial condition. In addition, the resolution of nonperforming assets requires significant commitments of time from management and our directors, which can be detrimental to the performance of their other responsibilities. There can be no assurance that we will not experience further increases in nonperforming loans in the future.

Our allowance for credit losses may not be adequate to cover actual losses.

A significant source of risk arises from the possibility that losses could be sustained because borrowers, guarantors, and related parties may fail to perform in accordance with the terms of their loans. The underwriting and credit monitoring policies and procedures that we have adopted to address this risk may not prevent unexpected losses that could have a material adverse effect on our business, financial condition, results of operations and cash flows. Unexpected losses may arise from a wide variety of specific or systemic factors, many of which are beyond our ability to predict, influence, or control.

Like all financial institutions, we maintain an allowance for credit losses to provide for loan defaults and non-performance. The allowance is funded from a provision for credit losses which is a charge to our statement of operations. The provisions charged to our income for the years ended December 31, 2009 and 2008 were $11.1 million and $23.9 million, respectively, which was the primary cause of our losses of $13.1 million and $10.7 million, respectively, for those periods. Our allowance as of the years ended December 31, 2009 and 2008 was $14.4 million and $12.4 million, respectively. Our allowance for credit losses may not be adequate to cover actual loan losses, and future provisions for credit losses could materially and adversely affect our business, financial condition, results of operations and cash flows. The allowance for credit losses reflects our estimate of the probable losses in our loan portfolio at the relevant balance sheet date. Our allowance for credit losses is based on prior experience, as well as an

evaluation of the known risks in the current portfolio, composition and growth of the loan portfolio and economic factors. The determination of an appropriate level of the allowance for credit losses is an inherently difficult process and is based on numerous assumptions. The amount of future losses is susceptible to changes in economic, operating and other conditions, including changes in interest rates, that may be beyond our control and these losses may exceed current estimates.

The process we use to estimate losses inherent in our credit exposure requires difficult, subjective and complex judgments, including forecasts of economic conditions and how these economic conditions might impair the ability of our borrowers to repay their loans. The level of uncertainty concerning current economic conditions may adversely affect the accuracy of our estimates, which may, in turn, impact the reliability of the allowance for loan losses.

While we believe that our allowance for credit losses is adequate to cover current losses, we cannot assure you that we will not increase the allowance for credit losses further or that regulators will not require us to increase this allowance in future periods. Either of these occurrences could materially adversely affect our business, financial condition, results of operations and cash flows.

The types of loans in our portfolio have a higher degree of risk than other loans and a further downturn in our real estate markets could, therefore, hurt our business.

A continuing downturn in our real estate markets could hurt our business because many of our loans are secured by real estate. Real estate values and real estate markets are generally affected by changes in national, regional or local economic conditions, fluctuations in interest rates and the availability of loans to potential purchasers, changes in tax laws and other governmental statutes, regulations and policies and acts of nature. As real estate prices continue to decline, the value of real estate collateral securing our loans is reduced. Our ability to recover on defaulted loans by foreclosing and selling the real estate collateral would then be diminished and we would be more likely to suffer losses on defaulted loans. As of December 31, 2009, approximately 84% of the book value of our loan portfolio consisted of loans collateralized by various types of real estate. Most of our real property collateral is located in California and more specifically, Nevada and Placer counties. If there is a continuing, significant decline in real estate values, especially in California, the collateral for our loans will provide less security. Real estate values could be affected by, among other things, earthquakes and natural disasters particular to California. Any such downturn could have a material adverse effect on our business, financial condition, results of operations and cash flows. We do not engage in “subprime” or “Alt-A” lending.

We have a concentration in loans secured by commercial real estate.

We have a high concentration in commercial real estate loans. Commercial real estate loans, as defined by final guidance issued by bank regulators, are defined as construction, land development, other land loans, loans secured by multifamily (5 or more) residential properties, and loans secured by non-farm nonresidential properties. Following this definition, at December 31, 2009, approximately 54.0% of our loan portfolio can be classified as commercial real estate lending. Commercial real estate loans generally involve a higher degree of credit risk than

residential mortgage lending due, among other things, to the large amounts loaned to individual borrowers. In addition, unlike residential mortgage loans, commercial real estate loans generally depend on the cash flow from the property to service the debt. Cash flow may be significantly affected by general economic conditions. Losses incurred on loans to a small number of borrowers could have a material adverse impact on our income and financial condition. Also, many of our commercial real estate borrowers have more than one loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a one- to four-family residential mortgage loan.

Additionally, federal banking regulators recently issued final guidance regarding commercial real estate lending. This guidance suggests that institutions that are potentially exposed to significant commercial real estate concentration risk will be subject to increased regulatory scrutiny. Institutions that have experienced rapid growth in commercial real estate lending, have notable exposure to a specific type of commercial real estate lending, or are approaching or exceed certain supervisory criteria that measure an institution’s commercial real estate portfolio against its capital levels, may be subject to such increased regulatory scrutiny. Our commercial real estate portfolio may be viewed as falling within one or more of the foregoing categories, and, accordingly, we may become subject to increased regulatory scrutiny because of our commercial real estate portfolio. If it is determined by our regulator that we have an undue concentration in commercial real estate lending, we may be required to maintain increased levels of capital and/or be required to reduce our concentration in commercial real estate loans.

Failure to successfully execute our strategy may adversely affect our performance.

Our financial performance and profitability depends on our ability to execute a long-term growth strategy. Continued growth, however, may present operating and other problems that could adversely affect our business, financial condition and results of operations. Accordingly, there can be no assurance that we will be able to execute a long-term growth strategy successfully or maintain the level of profitability that we have historically experienced during growth cycles. Factors that may adversely affect our ability to attain our long-term financial performance goals include those stated elsewhere in this section, as well as:


•		Inability to control non-interest expense, including, but not limited to, rising employee, regulatory compliance, and legal costs and other professional fees;

•		Inability to increase non-interest income;

•		Inability to expand our market share in our existing markets; and

•		Inability to effectively manage and mitigate credit risk.

Our internal operations are subject to a number of risks.

We are subject to certain operations risks, including, but not limited to, data processing system failures and errors, customer or employee fraud and catastrophic failures resulting from terrorist acts or natural disasters. We maintain a system of internal controls to mitigate against

such occurrences and maintain insurance coverage for such risks that are insurable, but should such an event occur that is not prevented or detected by our internal controls or is uninsured or in excess of applicable insurance limits, it could have a significant adverse impact on our business, financial condition or results of operations.


•		Information Systems

We rely heavily on communications and information systems to conduct our business. Many of these systems are provided by third parties. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the failure, interruption or security breach of our information systems, there can be no assurance that any such failures, interruptions or security breaches will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failures, interruptions or security breaches of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability, any of which could have a material adverse effect on our financial condition and results of operations. If any of our third-party service providers experience financial, operational or technological difficulties, or if there is any other disruption in our relationships with them, we may be required to locate alternative sources of such services, and we cannot assure you that we could negotiate terms that are as favorable to us, or could obtain services with similar functionality as found in the existing systems utilized by the Bank without the need to expend substantial resources, if at all.


•		Technological Advances

The financial services industry is continually undergoing rapid technological change with frequent introductions of new technology-driven products and services. Technological innovation continues to contribute to greater competition in domestic and international financial services markets as technological advances enable more companies to provide financial services. The effective use of technology increases efficiency and enables financial institutions to better serve customers and to reduce costs. Our future success depends, in part, upon our ability to address the needs of our customers by using technology to provide products and services that will satisfy customer demands, as well as to create additional efficiencies in our operations. Many of our competitors have substantially greater resources to invest in technological improvements. We may not be able to effectively implement new technology-driven products and services or be successful in marketing these products and services to our customers. Failure to successfully keep pace with technological change affecting the financial services industry could have a material adverse impact on our business and, in turn, our financial condition and results of operations.


•		Severe Weather, Natural Disasters, Acts of War or Terrorism and Other External Events

Severe weather, natural disasters, acts of war or terrorism and other adverse external events could have a significant impact on our ability to conduct business. Such events could affect the stability of our deposit base, impair the ability of borrowers to repay outstanding loans,

impair the value of collateral securing loans, cause significant property damage, result in loss of revenue and/or cause us to incur additional expenses. For example, Northern California is subject to earthquakes. Many of our borrowers could suffer uninsured property damage, experience interruption of their business or lose their jobs after a major disaster. Those borrowers might not be able to repay their loans, and the collateral for loans could decline significantly in value. Operations in our market could be disrupted by both the evacuation of large portions of the population as well as damage and/or lack of access to our banking and operation facilities. Although management has established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business, which, in turn, could have a material adverse effect on our financial condition and results of operations.

We depend on cash dividends from our subsidiary bank to meet our cash obligations and a failure to receive them could impair our ability to fulfill our obligations

As a holding company, dividends from our subsidiary bank provide a substantial portion of our cash flow used to service the payments on our preferred stock and our trust preferred securities and other obligations, including cash dividends, if any, to shareholders of common stock. Various statutory provisions restrict the amount of dividends our subsidiary bank can pay to us without regulatory approval.

We have a limited service area. This lack of geographic diversification increases our risk profile.

Our operations are located principally in Nevada County and the greater Auburn area in Placer County, California. As a result of this geographic concentration, our results depend largely upon economic and business conditions in this area. Deterioration in economic and business conditions in our service area could have a material adverse impact on the quality of our loan portfolio and the demand for our products and services, which in turn may have a material adverse effect on our results of operations.

Our ability to access markets for funding and acquire and retain customers could be adversely affected by the deterioration of other financial institutions or the financial service industry’s reputation.

Reputation risk is the risk to liquidity, earnings and capital arising from negative publicity regarding the financial services industry. The financial services industry continues to be featured in negative headlines about the global and national credit crisis and the resulting stabilization legislation enacted by the U.S. federal government. These reports can be damaging to the industry’s image and potentially erode consumer confidence in insured financial institutions, such as the Bank. In addition, our ability to engage in routine funding and other transactions could be adversely affected by the actions and commercial soundness of other financial institutions. Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. As a result, defaults by, or even rumors or questions about, one or more financial services institutions, or the financial services industry generally, have led to market-wide liquidity problems, losses of depositor, creditor and counterparty confidence and could lead to losses or defaults by us or by other institutions. We could

experience increases in deposits and assets as a direct or indirect result of other banks’ difficulties or failure, which would increase the capital we need to support such growth or we could experience severe and unexpected decreases in deposits which could adversely impact our liquidity, heighten regulatory concern or endanger our continuing existence.

We are dependent on key personnel and the loss of one or more of those key personnel may materially and adversely affect our prospects.

Competition for qualified employees and personnel in the banking industry is intense and there are a limited number of qualified persons with knowledge of and experience in the California community banking industry. The process of recruiting personnel with the combination of skills and attributes required to carry out our strategies will often be lengthy. Our success depends to a significant degree upon our ability to attract and retain qualified management, loan and deposit origination, administrative, marketing and technical personnel and upon the continued contributions of our management and personnel. The impact of TARP and related acts on executive and incentive compensation may also make it far more difficult to attract and retain key personnel.

Our success will be highly dependent on retaining the current executive management team who will work directly with the employees to implement the strategic direction of our Board of Directors. We believe this management team, who has worked in the banking industry for a number of years, is integral to implementing our business strategy. The loss of the services of any one of them could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Our business is subject to interest rate risk and variations in interest rates may negatively affect our financial performance.

Changes in the interest rate environment may reduce our net interest income. A substantial portion of the Bank’s income will be derived from the differential or “spread” between the interest earned on loans, securities and other interest-earning assets, and interest paid on deposits, borrowings and other interest-bearing liabilities. Because of the differences in the maturities and repricing characteristics of interest-earning assets and interest-bearing liabilities, we anticipate that changes in interest rates will not produce equivalent changes in interest income earned on interest-earning assets and interest paid on interest-bearing liabilities. Accordingly, fluctuations in interest rates could adversely affect our interest rate spread and, in turn, our profitability. In addition, loan volumes are affected by market interest rates on loans; rising interest rates generally are associated with a lower volume of loan originations while lower interest rates are usually associated with higher loan originations. Conversely, in rising interest rate environments, loan repayment rates will decline and in falling interest rate environments, loan repayment rates will increase. We cannot assure you that we can minimize our interest rate risk. In addition, an increase in the general level of interest rates may adversely affect the ability of certain borrowers to pay the interest on and principal of their obligations. Interest rates will also affect how much money we can lend. When interest rates rise, the cost of borrowing will increase. Accordingly, changes in levels of market interest rates could materially and adversely

affect our net interest spread, asset quality, loan and deposit origination volume, business, financial condition, results of operations and cash flows.

We will face strong competition from financial service companies and other companies that offer banking services which could hurt our business.

We conduct our banking operations largely in portions of Nevada County and the greater Auburn area in Placer County, California. Increased competition in our markets may result in reduced loans and deposits. Ultimately, we may not be able to compete successfully against current and future competitors. Many competitors offer the banking services that we offer in our service areas. These competitors include national banks, regional banks and other community banks. We will also face competition from many other types of financial institutions, including savings and loan associations, finance companies, brokerage firms, insurance companies, credit unions, mortgage banks and other financial intermediaries. In particular, our competitors may have greater resources that may afford them a marketplace advantage by enabling them to maintain numerous locations and mount extensive promotional and advertising campaigns. Additionally, banks and other financial institutions with larger capitalization and financial intermediaries not subject to bank regulatory restrictions may have larger lending limits which would allow them to serve the credit needs of larger customers. Areas of competition include interest rates for loans and deposits, efforts to obtain loan and deposit customers and a range in quality of products and services provided, including new technology-driven products and services. We also face competition from out-of-market financial intermediaries that have opened loan production offices or that solicit deposits in our market areas. If we are unable to attract and retain banking customers, we may be unable to achieve appropriate loan growth and level of deposits and our business, financial condition, results of operations and cash flows.

If we cannot attract deposits, our growth may be inhibited.

Our ability to increase our assets in the long-term depends in large part on our ability to attract additional deposits at competitive rates. We intend to seek additional deposits by offering deposit products that are competitive with those offered by other financial institutions in our markets and by establishing personal relationships with our customers. We cannot assure you that these efforts will be successful. Our inability to attract additional deposits at competitive rates could have a material adverse effect on our business, financial condition, results of operations and cash flows.

Liquidity risk could impair our ability to fund operations and jeopardize our financial condition.

Liquidity is essential to our business. An inability to raise funds through deposits, borrowings, the sale of loans and other sources could have a material adverse effect on our liquidity. Our access to funding sources in amounts adequate to finance our activities could be impaired by factors that affect us specifically or the financial services industry in general. Factors that could detrimentally impact our access to liquidity sources include a decrease in the level of our business activity due to a market downturn or adverse regulatory action against us, such as the Order. Our ability to acquire deposits or borrow could also be impaired by factors

that are not specific to us, such as a severe disruption of the financial markets or negative views and expectations about the prospects for the financial services industry as a whole as the recent turmoil faced by banking organizations in the domestic and worldwide credit markets deteriorates.

We will be exposed to risk of environmental liabilities with respect to properties to which we take title.

In the course of our business, we may foreclose and take title to real estate, and could be subject to environmental liabilities with respect to these properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or may be required to investigate or clean up hazardous or toxic substances, or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property. If we become subject to significant environmental liabilities, our business, financial condition, results of operations and cash flows may be materially and adversely affected.

If we fail to maintain an effective system of internal and disclosure controls, we may not be able to accurately report our financial results or prevent fraud. As a result, shareholders could lose confidence in our financial reporting, which would harm our business.

During the second quarter of 2009, management identified and addressed the circumvention of certain policies and procedures within the Company’s lending operations that had occurred during the latter part of 2008, and re-stated its 2008 financial statements.

Effective internal and disclosure controls are necessary for us to provide reliable financial reports and effectively prevent fraud. If we cannot provide reliable financial reports or prevent fraud, our reputation and operating results would be harmed. As part of our ongoing monitoring of internal controls, we may discover material weaknesses or significant deficiencies in our internal control as defined under standards adopted by the American Institute of Certified Public Accountants (“AICPA”), that require remediation. Under the AICPA standards, a “material weakness” is a significant deficiency or combination of significant deficiencies that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. A “significant deficiency” is a control deficiency or combination of control deficiencies, that is less severe than a material weakness, yet important enough to merit attention by those responsible for oversight of a company’s financial reporting.

As a result of weaknesses that may be identified in our internal controls, we may also identify certain deficiencies in some of our disclosure controls and procedures that we believe require remediation. If we discover weaknesses, we will make efforts to improve our internal and disclosure controls. However, there is no assurance that we will be successful. Any failure to maintain effective controls or timely place into effect any necessary improvement of our internal and disclosure controls could harm operating results or cause us to fail to meet our reporting

obligations. Ineffective internal and disclosure controls could also cause investors to lose confidence in our reported financial information. These circumstances could make it difficult or impossible for us to raise additional capital.

The restrictions on executive compensation that apply to the Company as a result of participation in TARP restrict our business.

As a result of the Company’s participation in the Capital Purchase Program (“CPP”), the Company is subject to the executive compensation restrictions applicable to CPP participants. These restrictions are mandated by way of EESA and the ARRA. As such, the Company must comply with many executive compensation and corporate governance restrictions including, but not limited to the following requirements: (i) ensuring that incentive compensation for senior executives does not encourage unnecessary and excessive risks that threaten the value of the financial institution; (ii) requiring the clawback of any bonus or incentive compensation paid to a senior executive based on statements of earnings, gains or other criteria that are later proven to be materially inaccurate; (iii) prohibiting making golden parachute payments to senior executives; and (iv) agreeing not to deduct for tax purposes, executive compensation in excess of $500,000 for each senior executive. The Company will also be subject to any changes in the executive compensation restrictions placed on CPP participants. Such restrictions and any future restrictions on executive compensation, which may be adopted, could adversely affect our ability to hire and retain senior executive officers.

Risks Related to an Investment in Our Shares

Historically, we have not paid dividends on our common stock and under California law we are currently ineligible to pay dividends.

We intend to follow a policy of retaining earnings, if any, for the purpose of increasing our capital and supporting further growth. It is not anticipated that we will pay cash dividends on our common stock anytime in the foreseeable future. Finally, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements and such other factors as our Board of Directors may deem relevant. Currently, we are ineligible to pay dividends under California law.

Our TARP preferred securities have a priority right to payment of dividends and the failure to resume paying dividends on the TARP preferred securities may adversely affect us.

On December 23, 2008, we completed a transaction with the Treasury under TARP, or the TARP Transaction. In the TARP Transaction, we sold 10,400 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series A to Treasury, which bears an initial dividend rate of 5% increasing to 9% after five years. In addition, Treasury received a warrant for the purchase of 520 shares of our Fixed Rate Cumulative Perpetual Preferred Stock, Series B, which bears a dividend rate of 9%. The warrant was immediately exercised.

The preferred securities issued in the TARP Transaction have a priority right to dividends and payment over our common stock. Any new dividends that we pay will also require the

approval of the Treasury. The dividends declared and the accretion on our outstanding preferred securities will reduce the net income available to common stockholders and our earnings per common share. Our outstanding preferred securities will also receive preferential treatment in the event of our liquidation, dissolution or winding-up. Our ability to repurchase shares of our common stock is also restricted by the TARP Transaction.

In order to conserve capital, we deferred our fourth consecutive dividend payment on the TARP preferred securities in May 2010 and are likely to be unable to make such quarterly payments for the foreseeable future. Until we pay all accrued and unpaid dividends current, we will not be able to declare or pay dividends on our common stock or repurchase shares of such stock. Additionally, if we defer an aggregate of six quarterly dividend payments, whether or not consecutive, the holder of the TARP preferred securities will have the right to elect two new directors to our Board of Directors.

Our trust preferred securities have a priority right to payment of dividends and the failure to resume paying interest on our trust preferred securities may adversely affect us.

We have supported our continued growth through the issuance of trust preferred securities. Trust preferred securities have a priority right to distributions and payment over our common stock. At December 31, 2009, we had trust preferred securities and related debt totaling approximately $15.5 million. Additionally, we are currently deferring interest payments on our trust preferred securities. Until we pay all currently due and deferred interest payments, we will not be able to declare or pay dividends on our common stock. Finally, all dividends are declared and paid at the discretion of our Board of Directors and are dependent upon our liquidity, financial condition, results of operations, capital requirements and such other factors as our Board of Directors may deem relevant.

The value of our tax loss carry forward may be reduced.

At December 31, 2009, we had approximately $22.5 million in tax loss carry-forwards which are available to offset taxes on future profits. It is probable that a “change in control” for purposes of the Internal Revenue Code will occur due to this Offering and/or any following on public offering. In such event, the value of the tax losses as an offset to taxes on future profits will be significantly reduced.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This prospectus includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, (the “Securities Act”) and Section 21E of the Securities Exchange Act of 1934, as amended, (the “Exchange Act”). Those sections of the Securities Act and Exchange Act provide a “safe harbor” for forward-looking statements to encourage companies to provide prospective information about their financial performance so long as they provide meaningful, cautionary statements identifying important factors that could cause actual results to differ significantly from projected results.

Forward-looking statements are based on management’s current expectations regarding economic, legislative, and regulatory issues that may impact our earnings in future periods. These statements may include statements regarding projected performance for periods following the completion of this Offering. They often include the words “believe,” “expect,” “intend,” “estimate” or words of similar meaning, or future or conditional verbs such as “will,” “would,” “should,” “could” or “may.” Similarly, statements that describe our future financial condition, results of operations, objectives, strategies, plans, goals or future performance and business are also forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties and other factors, including, but not limited to, those described in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections and other parts of this prospectus that could cause our actual results to differ materially from those anticipated in these forward-looking statements. The following factors, among others, could cause our financial performance to differ materially from our goals, objectives, intentions, expectations and other forward-looking statements:


	•	changes in general economic conditions, either nationally or locally in the Nevada County area or other areas in which we conduct or will conduct our business;

	•	the persistence of the ongoing economic crisis;

	•	inflation, interest rate, market and monetary fluctuations;

	•	real estate values and competition;

	•	changes in consumer spending habits and savings habits;

	•	increases in competitive pressures among financial institutions and businesses offering similar products and services;

	•	higher defaults on our loan portfolio than we expect;

	•	changes in management’s estimate of the adequacy of the allowance for credit losses;

	•	lower net income from operations;

	•	loss of more business or customers than we expect, or operating costs higher than we expect;

	•	ability to successfully grow our business in our market area;

	•	legislative or regulatory changes or changes in accounting principles, policies or guidelines;

	•	technological changes; and

	•	regulatory or judicial proceedings.

If one or more of the factors affecting our forward-looking information and statements proves incorrect, then our actual results, performance or achievements could differ materially from those expressed in, or implied by, forward-looking information and statements contained in this prospectus. Therefore, we caution you not to place undue reliance on our forward-looking information and statements.

You should read this prospectus completely and with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements. We do not undertake any obligation to release publicly our revisions to such forward-looking statements to reflect events or circumstances after the date of this prospectus.

USE OF PROCEEDS

This prospectus relates to units being offered by us in the Offering, including the shares of common stock and 2010 Warrants that make up the units. The maximum net proceeds from the sale of units are expected to be up to $20 million before deducting our estimated offering expenses. However, the net proceeds could be considerably less but the amount of new equity capital and earnings that we achieve must not be less than the amount that would result in the Bank being in substantial compliance with the Capital Requirement of the Order or we will not close the Offering.

We plan to use the net proceeds from this Offering to support our capital ratios. The capital raised in this Offering will be needed in order for us to maintain “well capitalized” status under the bank regulatory capital ratio guidelines and the Order to which we are subject. See “Summary – Consent Order and Written Agreement.”

The proceeds contributed to the Bank will be used for general banking purposes including the making of loans and the purchase of investments. Accordingly, our management will retain broad discretion in the allocation of the net proceeds of this Offering.

TRADING HISTORY AND DIVIDEND POLICY

Prior to this Offering there has been a limited public market for our common stock. Our common stock is quoted under the symbol “CZNB” on the OTC Bulletin Board. The following table presents for each quarterly period presented the high and low closing sale prices of our common stock. The closing prices have been adjusted for the effect of a 5% stock dividend distributed on June 19, 2008. Prices do not include retail mark-ups, markdowns or commissions.


Quarter Ended	Closing Prices
2008	Low		High
March 31	$	12.14	$	17.24
June 30	$	12.67	$	18.10
September 30	$	11.35	$	16.25
December 31	$	7.10	$	15.75
2009
March 31	$	5.75	$	9.50
June 30	$	4.05	$	9.50
September 30	$	4.00	$	7.00
December 31	$	3.50	$	5.75
2010
March 31	$	3.50	$	5.25
June 30	$	2.75	$	4.00

We do not pay cash dividends as we have used our current and retained earnings to support our growth. We do not foresee any circumstances in the immediate future in which we would consider paying cash dividends on our common stock.

Additionally, our junior subordinated debt agreements and our preferred stock contain provisions that prohibit our paying dividends if we have deferred payment of interest on outstanding trust preferred securities or are in arrears in the payment of dividends on our preferred stock. We are currently in arrears on dividend payments on our preferred stock. For a discussion of the limitations on dividends, see “Business - Supervision and Regulation – Payment of Dividends.” We also expect that we will be deferring interest payments on the trust preferred securities.

CAPITALIZATION

The following table sets forth our capitalization as of March 31, 2010 on an actual and pro forma basis. The pro forma basis is adjusted to reflect receipt and application by us of the maximum estimated net proceeds from our sale of 6,666,667 shares of our common stock in the Offering at an offering price of $3.00 per share, after deducting the estimated offering expenses.

You should read this table in conjunction with the financial statements and the other financial information included in this prospectus.


	As of March 31, 2010

(Unaudited)	Actual			Pro Forma

	(Dollars in thousands, except share and per share amounts)
Indebtedness:
Borrowings	$	26,000		$
Junior subordinated debentures		15,465
Shareholders’ Equity:
Serial preferred stock - 5,000,000 shares authorized
Series A preferred stock; 10,400 shares outstanding		9,979
Series B preferred stock; 520 shares outstanding		520
Common stock - no par value; 20,000,000 shares authorized, 2,310,090 shares outstanding, actual; [*] shares outstanding, pro forma		15,943
Accumulated deficit		(16,585	)
Accumulated other comprehensive income, net of taxes		18

Total shareholders’ equity		9,875

Total capitalization	$	51,340		$


Citizens Bancorp Capital Ratios:
Leverage capital ratio		3.7	%
Tier 1 risk-based capital ratio		4.4	%
Total risk-based capital ratio		9.5	%
Citizens Bank of Northern California Capital Ratios:
Leverage capital ratio		6.8	%
Tier 1 risk-based capital ratio		8.0	%
Total risk-based capital ratio		9.3	%

Book value per common share	$	(0.27	)	$

DILUTION

If you invest in our common stock, you will suffer substantial dilution to the extent the offering price per share of our common stock exceeds the tangible book value of our common stock immediately after this Offering. The book value of our common stock as of December 31, 2009 was negative $968,000, or $0.42 per share of common stock. The tangible book value per share, as adjusted, represents shareholders’ equity divided by the 2,310,090 shares of our common stock outstanding as of that date.

After giving effect to the issuance and sale of 6,666,667 shares of our common stock in this Offering and our receipt of approximately $20 million in net proceeds from such sale, based on an offering price of $3.00 per share, and after deducting the estimated expenses of the offering, our as adjusted tangible book value as of December 31, 2009 would have been approximately $[*], or $[*] per share. This amount represents an immediate increase in tangible book value per share of $[*] to existing shareholders and an immediate dilution of $[*] per share to purchasers of our common stock in this Offering. Dilution is determined by subtracting the tangible book value per share as adjusted for this offering from the amount of cash paid by a new investor for a share of our common stock.


The following table illustrates the per share dilution as of December 31, 2009:

Offering price per share	$3.00

Book value per common share as of December 31, 2009, actual	($0.42)

Increase in tangible book value per share attributable to new investors	$[*]

As adjusted tangible book value per share after this offering	$[*]

Dilution per share to new investors	$[*]

The shares of common stock outstanding exclude 661,689 shares of common stock reserved for issuance under our stock option plans of which 67,082 shares were subject to outstanding options at December 31, 2009. To the extent that options are exercised or other share awards are made under our stock option plan, there may be further dilution to new investors.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion and analysis of our financial condition and results of operations together with “Selected Consolidated Financial Information” and our financial statements and related notes appearing elsewhere in this prospectus. This discussion and analysis may contain forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in the forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this prospectus.

Critical Accounting Policies

The Company’s financial statements are prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The Company’s accounting policies are integral to understanding the financial results reported. The most complex of these accounting policies require management’s judgment to ascertain the valuation of assets, liabilities, commitments and contingencies. The Company has established detailed policies and internal control procedures that are intended to ensure valuation methods are well controlled and consistently applied from period to period. In addition, the policies and procedures are intended to ensure that the process for changing methodologies occurs in an appropriate manner. The accounting areas where management’s judgment is most likely to materially impact the Company’s financial results are:

Allowance for Credit Losses

The allowance for credit losses is maintained to provide for estimated credit losses that are probable the Company will incur as of the balance sheet date. Loans determined to be impaired are evaluated individually by management for determination of the specific loss, if any, that exists as of the balance sheet date. In addition, reserve factors are assigned to currently performing loans by loan type based on historical loss rates and adjusted for various qualitative factors such as economic and market conditions, concentrations and other trends within the credit portfolio. When management believes that additional reserves are needed, the allowance for credit losses is increased by recording a charge to operations through the provision for loan losses. The allowance is decreased as loans are charged-off, net of recoveries. Management reviews the adequacy of the allowance for credit losses at least quarterly.

Management believes the allowance for credit losses is a “critical accounting estimate” because management’s estimate of loan losses on loans not already identified as impaired, requires management to carefully evaluate the pertinent facts and circumstances as of the balance sheet date to determine how much, if any, adjustment is required to the historical loss rate for each loan type. In addition, estimates of loan losses on currently performing loans are subject to change in future reporting periods as facts and circumstances change. For example, a continued decline in the California real estate market may result in management increasing its estimate of loan losses if such estimated losses are considered probable at the balance sheet date. Furthermore, the FDIC and DFI, as an integral part of their examination process, review the

allowance for credit losses. These agencies may require additions to the allowance for credit losses based on their judgment about information at the time of their examinations.

We cannot provide you with any assurance that economic difficulties or other circumstances which would adversely affect our borrowers and their ability to repay outstanding loans will not occur which would be reflected in increased losses in our loan portfolio, which could result in actual losses that exceed reserves previously established.

Other Real Estate Owned and Foreclosed Assets

Other real estate owned (“OREO”) or other foreclosed assets acquired through loan foreclosure are initially recorded at fair value less costs to sell when acquired, establishing a new cost basis. Any adjustment at the time of foreclosure or shortly thereafter is recorded through the allowance for credit losses. Due to the subjective nature of establishing the fair value when the asset is acquired, the actual fair value of other real estate owned or foreclosed asset could differ from the original estimate. If it is determined that fair value has declined subsequent to foreclosure, a valuation allowance is recorded through non-interest expense. Operating costs associated with the assets after acquisition are also recorded as non-interest expense. Gains and losses on the disposition of other real estate owned and foreclosed assets are netted and recorded in other non-interest income or expense.

Deferred Income Tax Assets/Liabilities

Our net deferred income tax asset arises from differences in the dates that items of income and expense enter into our reported income and taxable income. Deferred tax assets and liabilities are established for these items as they arise. From an accounting standpoint, deferred tax assets are reviewed to determine if a valuation allowance is required based on both positive and negative evidence currently available. Positive evidence includes the historical levels of our taxable income, estimates of our future taxable income including tax planning strategies, the reversals of deferred tax liabilities and taxes available in carry-back years. Negative evidence primarily includes the cumulative deficit, the Company not meeting its financial projections in 2009 or 2008 and the ongoing levels of nonperforming assets. Additionally, projected or future economic and business conditions have been considered, and we have determined the need to establish a valuation allowance for deferred tax assets, based on the weight of available evidence, that it is less likely that some portion or all of the deferred tax assets may be realized.

Additionally, the Company reviews its uncertain tax positions annually. An uncertain tax position is recognized as a benefit only if it is “more likely than not” that the tax position would be sustained in a tax examination, with a tax examination being presumed to occur. The amount actually recognized is the largest amount of tax benefit that is greater than 50% likely to be recognized on examination. For tax positions not meeting the “more likely than not” test, no tax benefit is recorded. A significant amount of judgment is applied to determine both whether the tax position meets the “more likely than not” test as well as to determine the largest amount of tax benefit that is greater than 50% likely to be recognized. Differences between the position taken by management and that of taxing authorities could result in a reduction of a tax benefit or increase to tax liability, which could adversely affect future income tax expense.

Results of Operations

The following discussion is designed to provide a better understanding of significant trends related to the Company’s financial condition, results of operations, liquidity and capital. It pertains to the Company’s financial condition, changes in financial condition and results of operations as of March 31, 2010, December 31, 2009 and 2008 and for each of the years in the three year period ended December 31, 2009 and for the three months ended March 31, 2010. The discussion should be read in conjunction with the Company’s audited consolidated financial statements and notes thereto and the other financial information appearing elsewhere herein.

Overview

The following table presents our key performance indicators for the years ended December 31, 2009, 2008 and 2007:


	Year Ended December 31,

	2009			2008			2007

	(Dollars in thousands, except share and per share data)

Net interest income	$	15,122		$	15,100		$	14,294
Provision for credit losses		11,115			23,900			945

Net interest income (loss) after provision for credit losses		4,007			(8,800	)		13,349
Non-interest income		5,112			2,140			2,206
Non-interest expense		15,691			11,653			11,242
Provision for (benefit from) income taxes		6,568			(7,662	)		1,728

Net (loss) income		(13,140	)		(10,651	)		2,585
Dividends and discount accretion on preferred stock		(328	)		—			—

Net (loss) income applicable to common shareholders	$	(13,468	)	$	(10,651	)	$	2,585

Average assets	$	376,524		$	350,545		$	301,885
Average shareholders’ equity	$	18,523		$	20,960		$	20,233
Share Information:
Weighted average shares outstanding – basic		1,920,300			1,915,117			1,911,897
Weighted average shares outstanding - diluted		1,920,300			1,915,117			1,956,595
Profitability Measures:
(Loss) earnings per share – basic	$	(7.01	)	$	(5.56	)	$	1.35
(Loss) earnings per share – diluted	$	(7.01	)	$	(5.56	)	$	1.32
Return on average assets		(3.58	)%		(3.04	)%		0.86	%
Return on average shareholders’ equity		(72.71	)%		(50.82	)%		12.77	%
Efficiency Ratio		77.55	%		67.60	%		68.14	%

All share and per share data for 2007 has been adjusted for 5% stock dividends distributed on June 19, 2008.

Our Company has been affected by an economic downturn unprecedented in recent memory. After recording a valuation allowance on deferred tax assets of $9.3 million and impairment charges related to OREO of $3.4 million, the net loss for the year ended December 31, 2009 was $13.5 million, or $7.01 loss per share, compared to a loss of $10.7 million, or $5.56 loss per share, for the same period in 2008. The results for 2009 as compared to 2008 were benefited by a decrease in the provision for loan losses of $12.8 million and a gain on sale of loans of $2.8 million.

The following table presents our key performance indicators for the three months ended March 31, 2010 and 2009:


	For the Three Months Ended March 31,

(Unaudited)	2010			2009

	(Dollars in thousands, except share and per share data)

Net interest income	$	3,577		$	3,524
Provision for credit losses		600			2,000

Net interest income after provision for credit losses		2,977			1,524
Non-interest income		579			522
Non-interest expense		3,193			4,571
Provision for (benefit from) income taxes		—			(1,020	)

Net income(loss)		363			(1,505	)
Dividends and discount accretion on preferred stock		(26	)		(108	)

Net income (loss) applicable to common shareholders	$	337		$	(1,613	)


Average assets	$	354,717		$	366,861
Average shareholders’ equity	$	9,690		$	20,502
Share Information:
Weighted average shares outstanding – basic		2,310,090			1,915,981
Weighted average shares outstanding – diluted		2,310,090			1,915,981
Profitability Measures:
Earnings (loss) per share – basic	$	0.15		$	(0.84	)
Earnings (loss) per share – diluted	$	0.15		$	(0.84	)
Return on average assets		0.38	%		(1.78	)%
Return on average shareholders’ equity		14.09	%		(31.90	)%
Efficiency ratio		76.84	%		112.96	%

Net income for the three month period ended March 31, 2010 was $337 thousand compared to a net loss of $1.6 million for the same period in 2009. The primary contributors to improving the Company’s earnings for the three months ended March 31, 2010 was a reduction in the provision for credit losses and in the costs and impairment charges associated with OREO. The provision for credit losses for the three month period ended March 31, 2010 was $600 thousand, a reduction of $1.4 million compared to the $2.0 million recorded during the same period in 2009. Costs and impairment charges associated with OREO were $77 thousand for the three month period ended March 31, 2010, compared to $1.6 million during the same period in 2009. Earnings per diluted share for the three months ended March 31, 2010 were $0.15, compared to a loss per share for the three months ended March 31, 2009 of $0.84.

Consistent with the Company’s plan to reduce assets and improve its capital ratios by reducing borrowings and brokered deposits, total assets as of March 31, 2010 were $338.4 million, a decrease of $32.7 million, or 9%, from $371.1 million as of December 31, 2009. Total loans as of March 31, 2010 were $296.6 million, a decrease of $8.1 million, or 3%, from $304.7 million as of December 31, 2009. Over the same period, deposits decreased $19.0 million, or 6%, to $283.6 million at March 31, 2010, compared to $302.6 million at December 31, 2009.

Total assets as of December 31, 2009 were $371.1 million, an increase of $7.8 million, or 2%, from $363.3 million as of December 31, 2008. Total loans as of December 31, 2009 were $304.7 million, a decrease of $7.6 million, or 2%, from $312.4 million as of December 31, 2008. Over the same period, deposits grew $2.9 million, or 1%, to $302.6 million at December 31, 2009, compared to $299.8 million at December 31, 2008. The deposit growth reflects the growth of deposits in the Bank’s core markets of $32 million, offset by brokered deposit maturities of $29.1 million.

Looking forward: 2010 and beyond

In management’s opinion, the following key issues will influence the financial results of the Company in 2010 and future years:


•	We must recapitalize the Company to overcome the losses sustained in 2009 and 2008 and the first six months of 2010. In December 2009, we started that process by raising nearly $1.6 million in capital from a private placement stock sale in order to strengthen the Bank’s balance sheet and capital position. A majority of the funds were raised from directors, officers and other charter members of the Board. In addition, in April 2010, as a continuation of the private placement, we received an additional $100,000.

•	We must attempt to bring ourselves into compliance with the Order as quickly as possible in order to reduce the actual costs involved in achieving compliance and refocus management’s attention on traditional banking activities.

•	Our results can be significantly influenced by changes in the credit quality of our borrowers. Nonaccrual loans totaled $31.1 million or 10.5% of total loans at March 31, 2010. The provision for credit losses was $11.1 million in 2009, a significant decrease over the $23.9


	million in 2008. The provision for credit losses was $600 thousand for the three months ended March 31, 2010. As the economy and real estate values stabilize, management anticipates that loan loss provisions in 2010 and 2011 will be less than the 2009 and 2008 levels. However, with the current economic conditions in the United States and California, and an increasing number of borrowers who are impacted by the recession, substantial uncertainty regarding the timing and extent of economic recovery, if any, remains. As such, increases in the level of provisioning for credit losses may be necessary.

•	Our earnings are sensitive to changes in market interest rates. Our balance sheet is slightly asset sensitive and as a result, our net interest margin tends to increase in a rising interest rate environment and decline in a falling interest rate environment. Throughout 2009, interest rates have been at historically low levels, which compressed our net interest margin. As the Federal Reserve begins to increase interest rates, our net interest margin will begin to rise as well. Management does not anticipate a significant impact until interest rates increase by 2%, when it is expected that variable rate loans will begin to rise above their current floors.

	In addition to changes in market interest rates, the net interest margin has come under pressure from: (1) aggressive competitor pricing strategies for both loans and deposits to which the Company needs to respond in order to retain customers; and (2) changes in deposit mix as customers move funds from low or non-interest bearing transaction and savings accounts to higher yielding time deposits.

•	In February 2010, the Bank relocated its Central Operations Department to its downtown Grass Valley location, making room for the Bank to lay the early groundwork for establishing a Small Business Administration (“SBA”) Lending Division at their Nevada City Loan Operations Center. These moves are part of several strategies the Bank has put into motion to position the Bank for the future. These strategies will enable the Bank to provide continued excellent service, enhance its menu of financial products offered, increase efficiency and improve financial performance. The Bank’s move to broaden its SBA lending and seek “Preferred Lender” status is part of a long-term strategy in providing loans to small business, both real estate and non-real estate related, under a government guaranteed program.

Results of Operations

Net Interest Income and Net Interest Margin

Net interest income is the difference between interest earned on assets and interest paid on liabilities. Net interest margin is net interest income expressed as a percentage of average interest earning assets. Our balance sheet is asset sensitive and as a result, our net interest margin tends to increase in a rising interest rate environment and decline in a falling interest rate environment. The majority of our earning assets are tied to market rates, such as the prime rate, and therefore rates on our earning assets generally reprice along with a movement in market rates while interest bearing liabilities, primarily deposits, typically reprice more slowly and usually incorporate only a portion of the movement in market rates.

The following tables present, for the periods indicated, the distribution of average assets, liabilities and shareholders’ equity, as well as the net interest income from average interest earning assets and the resultant yields expressed as percentages. Non-accrual loans are included in the calculation of average loans while non-accrued interest thereon is excluded from the computation of yields earned.


	Year Ended December 31,

	2009								2008								2007

	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost

	(Dollars in thousands)
ASSETS

Interest earning assets:
Total loans (1) (2) (3)	$	310,253		$	19,215		6.19	%	$	316,500		$	21,801		6.89	%	$	279,221		$	22,428		8.03	%
Investment securities available-for-sale (1)		1,670			40		2.40	%		1,205			40		3.32	%		1,446			55		3.80	%
Federal funds sold		8,409			8		0.10	%		9,440			125		1.32	%		1,981			66		3.33	%
Interest bearing deposits with other banks		15,021			27		0.18	%		323			5		1.55	%		172			8		3.33	%

Total interest earning assets		335,353			19,290		5.75	%		327,468			21,971		6.71	%		282,820			22,557		7.98	%

Non-interest earning assets:

Cash and due from banks		26,305								7,182								8,891
Allowance for credit losses		(13,988	)							(4,678	)							(3,586	)
Other assets		28,854								20,573								13,760

Total assets	$	376,524							$	350,545							$	301,885

LIABILITIES AND SHAREHOLDERS’ EQUITY

Interest bearing liabilities:

Deposits :

Interest bearing demand	$	39,073			9		0.02	%	$	34,547			10		0.03	%	$	28,314			105		0.37	%
Money market		59,143			719		1.22	%		60,586			1,418		2.34	%		54,624			1,658		3.04	%
Savings		16,953			67		0.40	%		13,634			72		0.53	%		11,910			112		0.94	%
Time certificates of deposit		120,464			2,431		2.02	%		112,194			3,950		3.52	%		96,695			4,815		4.98	%

Total interest bearing deposits		235,633			3,226		1.37	%		220,961			5,450		2.47	%		191,543			6,690		3.49	%
Borrowings		30,875			473		1.53	%		22,638			493		2.18	%		5,613			398		7.09	%
Junior subordinated debentures		15,465			469		3.03	%		15,465			928		6.00	%		15,465			1,175		7.60	%

Total interest bearing liabilities		281,973			4,168		1.48	%		259,064			6,871		2.65	%		212,621			8,263		3.89	%

Non-interest bearing liabilities:

Demand deposits		72,397								66,933								65,860
Other liabilities		3,631								3,588								3,171

Total liabilities		358,001								329,585								281,652
Shareholders’ equity		18,523								20,960								20,233

Total liabilities and shareholders’ equity	$	376,524							$	350,545							$	301,885

Net interest income				$	15,122							$	15,100							$	14,294

Net interest margin (4)							4.51	%							4.61	%							5.05	%


(1)	Yields on loans and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not considered significant.

(2)	Average nonaccrual loan balances of $26.7 million for 2009, $10.5 million for 2008 and $2.9 million for 2007 are included in average loan balances for computational purposes.


(3)	Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $112,000 for 2009 and net loan fees of, $152,000 and $257,000 for 2008 and 2007, respectively.

(4)	Net interest margin is computed by dividing net interest income by total average earning assets.

The following tables show the change in interest income and interest expense and the amount of change attributable to variances in volume and rates:


	Year Ended December 31, 2009 Compared to Year Ended December 31, 2008

	Volume			Rate (1)			Net Change

	(Dollars in thousands)
Interest income:
Loans	$	(430	)	$	(2,156	)	$	(2,586	)
Investment securities available-for-sale		15			(15	)		—
Federal funds sold		(14	)		(103	)		(117	)
Interest bearing deposits with other banks		228			(206	)		22

Total interest income		(201	)		(2,480	)		(2,681	)


Interest expense:
Interest bearing demand		1			(2	)		(1	)
Money market		(34	)		(665	)		(699	)
Savings		18			(23	)		(5	)
Time certificates of deposit		291			(1,810	)		(1,519	)
Borrowings		179			(199	)		(20	)
Junior subordinated debentures		—			(459	)		(459	)

Total interest expense		455			(3,158	)		(2,703	)

Net interest income	$	(656	)	$	678		$	22


	Year Ended December 31, 2008 Compared to Year Ended December 31, 2007

	Volume			Rate (1)			Net Change

	(Dollars in thousands)
Interest income:
Loans	$	2,994		$	(3,621	)	$	(627	)
Investment securities available-for-sale		(9	)		(6	)		(15	)
Federal funds sold		249			(190	)		59
Interest bearing deposits with other banks		7			(10	)		(3	)

Total interest income		3,241			(3,827	)		(586	)


Interest expense:
Interest bearing demand		23			(118	)		(95	)
Money market		181			(421	)		(240	)
Savings		16			(56	)		(40	)
Time certificates of deposit		772			(1,637	)		(865	)
Borrowings		1,207			(1,112	)		95
Junior subordinated debentures		—			(247	)		(247	)

Total interest expense		2,199			(3,591	)		(1,392	)

Net interest income	$	1,042		$	(236	)	$	806

(1) Factors contributing to both changes in rate and volume have been attributed to changes in rates.


(Unaudited)	Three Months Ended March 31, 2010								Three Months Ended March 31, 2009

	Average Balance			Interest Income or Expense		Average Yield or Cost			Average Balance			Interest Income or Expense		Average Yield or Cost

Assets:	(Dollars in thousands)
Interest-earning assets:
Loans (1)	$	300,681		$	4,216		5.69	%	$	313,813		$	4,790		6.19	%
Investment securities		1,877			15		3.24	%		1,673			13		3.15	%
Federal funds sold		—			—		0.00	%		16,273			5		0.12	%
Interest-bearing deposits with other banks		17,250			11		0.26	%		465			-		0.00	%

Total interest-earning assets		319,808			4,242		5.38	%		332,224			4,808		5.87	%

Non-earning assets:
Cash and due from banks		31,647								17,119
Allowance for credit losses		(13,974	)							(13,108	)
Other assets		17,236								30,626

Total assets	$	354,717							$	366,861


Liabilities:
Interest-bearing liabilities:
Interest-bearing demand	$	42,937			2		0.02	%	$	35,755			3		0.03	%
Money market		63,232			109		0.70	%		57,299			204		1.44	%
Savings		18,453			11		0.24	%		15,690			17		0.44	%
Time certificates of deposit		92,590			334		1.46	%		127,195			819		2.61	%

Total interest-bearing deposits		217,212			456		0.85	%		235,939			1,043		1.79	%
Borrowing		33,000			116		1.43	%		25,500			106		1.69	%
Trust preferred securities		15,465			93		2.44	%		15,465			135		3.54	%

Total interest-bearing liabilities		265,677			665		1.02	%		276,904			1,284		1.88	%

Noninterest-bearing liabilities:
Demand deposits		75,899								65,675
Other liabilities		3,451								3,780

Total liabilities		345,027								346,359

Shareholders' equity		9,690								20,502

Total liabilities and shareholders' equity	$	354,717							$	366,861


Net interest income				$	3,577							$	3,524

Net interest margin (4)							4.54	%							4.30	%


(1)	Yields on loans and tax exempt securities have not been adjusted to a tax-equivalent basis because the impact is not considered significant.

(2)	Nonaccrual loan balances of $31.1 million for 2010 and $24.9 million for 2009 are included in average loan balances for computational purposes.


(3)	Loan origination fees and costs are included in interest income as adjustments of the loan yields over the life of the loan using the interest method. Loan interest income includes net loan costs of $4,000 for 2010 and $23,000 for 2009, respectively.

(4)	Net interest margin is computed by dividing net interest income by total average earning assets.

The following tables show the change in interest income and interest expense and the amount of change attributable to variances in volume and rates:


	Three Months Ended March 31, 2010 Compared to the Three Months Ended March 31, 2009

	Volume			Rate (1)			Net Change

	(Dollars in thousands)
Interest income:
Loans	$	(200	)	$	(374	)	$	(574	)
Investment securities		2			—			2
Federal funds sold		(5	)		—			(5	)
Interest-bearing deposits with other banks		—			11			11

Total interest income		(203	)		(363	)		(566	)


Interest expense:
Interest-bearing demand		1			(2	)		(1	)
Money market		21			(116	)		(95	)
Savings		3			(9	)		(6	)
Time certificates of deposit		(223	)		(262	)		(485	)
Borrowings		31			(21	)		10
Junior subordinated debentures		—			(42	)		(42	)

Total interest expense		(167	)		(452	)		(619	)

Net interest income	$	(36	)	$	89		$	53


(1)	Factors contributing to both changes in rate and volume have been attributed to changes in rates.

2009 Compared to 2008

Net interest income remained relatively unchanged and was $15.1 million for both years ended December 31, 2009 and 2008. Average earning assets increased 2.4%, or $7.9 million, to $335.4 million for the year ended December 31, 2009, from $327.5 million for 2008. Average loans, net of deferred fees and costs, decreased by 2.0%, or $6.2 million, to $310.3 million for the year ended December 31, 2009, from $316.5 million for 2008. Average deposits increased 7.0%, or $20.1 million, to $308.0 million for the year ended December 31, 2009, from $287.9 million for 2008. Average noninterest bearing deposits as a percent of total average deposits remained consistent at approximately 23% during the years ended December 31, 2009 and 2008.

The net interest margin for the year ended December 31, 2009 decreased ten basis points to 4.51%, from 4.61% for 2008. The compression of the net interest margin was primarily a result of forgone interest on non-accrual and restructured loans, which was partially mitigated by improved cost of funds. Forgone interest on non-accrual and restructured loans adversely impacted the net interest margin by 64 basis points and 31 basis points for years ended December 31, 2009 and 2008, respectively.

Interest income decreased 12.2%, or $2.7 million, to $19.3 million for the year ended December 31, 2009, from $22.0 million for 2008. Average loans, net of deferred fees and costs, decreased by 2.0%, or $6.2 million, to $310.3 million for the year ended December 31, 2009, from $316.5 million for 2008, and yielded 6.19% for the year ended December 31, 2009, compared to 6.89% for 2008. The yield on average loans was negatively impacted by an increase in non-accrual and restructured loans and reflects the impact of loans that re-priced during a period of declining short-term interest rates. The yield on investment securities and federal funds sold decreased to 2.40% and 0.10%, respectively, for the year ended December 31, 2009, from 3.32% and 1.32%, respectively, for the 2008 year. These declines in yield were directly related to the declining rate environment.

Interest expense on all interest bearing liabilities decreased 39.3%, or $2.7 million, to $4.2 million for the year ended December 31, 2009, from $6.9 million in 2008. Total average interest bearing liabilities increased 8.8%, or $22.9 million, to $282.0 million for the year ended December 31, 2009, from $259.1 million for 2008. The cost of interest bearing liabilities decreased to 1.48% for the year ended December 31, 2009, from 2.65% for 2008. This decrease was primarily the result of a decrease in deposit rates paid on time and money market deposits and on junior subordinated deferrable interest debentures as a result of a lower interest rate environment.

Interest expense on interest bearing deposits decreased 40.8%, or $2.2 million, to $3.2 million for the year ended December 31, 2009, from $5.4 million for 2008. The decrease is attributable to a decrease in deposit rates paid on all deposit types during the year ended December 31, 2009 as a result of the interest rate environment which has been in decline since 2007. The overall cost of deposits decreased to 1.05% for the year ended December 31, 2009, from 1.89% for 2008. This overall cost differs from the cost of total interest bearing deposits of 1.37% and 2.47% for the years ended December 31, 2009 and 2008, respectively due to the substantial percentage of our funding sources which are non-interest bearing demand deposits, which were 23.5% of average total deposits for the year ended December 31, 2009, compared to 23.2% for 2008. At December 31, 2009 non-interest bearing deposits as a percent of total deposits were 25.2%, an increase over the 21.8% at December 31, 2008.

2008 Compared to 2007

Net interest income increased 5.6%, or $806,000, to $15.1 million for the year ended December 31, 2008, from $14.3 million for 2007. Average earning assets increased 15.8%, or $44.6 million, to $327.5 million for the year ended December 31, 2008, from $282.8 million for 2007. Average loans, net of deferred fees and costs, increased by 13.4%, or $37.3 million, to $316.5 million for the year ended December 31, 2008, from $279.2 million for 2007. Average

deposits increased 11.8%, or $30.5 million, to $287.9 million for the year ended December 31, 2008, from $257.4 million for 2007.

The net interest margin for the year ended December 31, 2008 decreased 44 basis points to 4.61%, from 5.05% for 2007. The compression of the net interest margin was primarily a result of a lower interest rate environment in 2008 compared to 2007.

Interest income decreased 2.6%, or $586,000, to $22.0 million for the year ended December 31, 2008, from $22.6 million for 2007. Average loans, net of deferred fees and costs, decreased by 13.4%, or $37.3 million, to $316.5 million for the year ended December 31, 2008, from $279.2 million for 2007, and yielded 6.89% for the year ended December 31, 2008, compared to 8.03% for 2007. The yield on average loans in 2008 was negatively impacted by an increase in non-accrual loans and the impact of variable rate loans that re-priced during a period of declining short-term interest rates. The yield on investment securities decreased to 3.32% for the year ended December 31, 2008, from 3.80% for 2007.

Interest expense on all interest bearing liabilities decreased 16.9%, or $1.4 million, to $6.9 million for the year ended December 31, 2008, from $8.3 million in 2007. Total average interest bearing liabilities increased 21.8%, or $46.4 million, to $259.1 million for the year ended December 31, 2008, from $212.6 million for 2007. The cost of interest bearing liabilities decreased to 2.65% for the year ended December 31, 2008, from 3.89% for 2007. This decrease was primarily the result of a decrease in deposit rates paid on time and money market deposits and borrowings, as a result of a lower interest rate environment.

Interest expense on interest bearing deposits decreased 18.5%, or $1.2 million, to $5.4 million for the year ended December 31, 2008, from $6.7 million for 2007. The decrease is primarily attributable to a decrease in deposit rates paid on all deposit types during the year ended December 31, 2008 as a result of a lower interest rate environment. The overall cost of deposits decreased to 1.89% for the year ended December 31, 2008, from 2.60% for 2007. This overall cost differs from the cost of total interest bearing deposits of 1.37% and 2.47% for the years ended December 31, 2009 and 2008, respectively due to the substantial percentage of our funding sources which are non-interest bearing demand deposits, which were 23.2% of average total deposits for the year ended December 31, 2008, a decrease from 25.6% for 2007. This decrease was primarily the result of an increase in the use of brokered time deposits to fund loan growth in 2008.

March 31, 2010 Compared to March 31, 2009

Net interest income increased by 1.5%, or $53 thousand, to $3.6 million for the three months ended March 31, 2010, from $3.5 million for the same period of 2009. Average earning assets decreased 3.7%, or $12.4 million, to $319.8 million for the three months ended March 31, 2010, from $332.2 million for the same period of 2009. Average loans, net of deferred fees and costs, decreased by 4.2%, or $13.1 million, to $300.7 million for the three months ended March 31, 2010, from $313.8 million for the same period of 2009. Average deposits decreased 2.8%, or $8.5 million, to $293.1 million for the three months ended March 31, 2010, from $301.6 million for the same period of 2009. Average noninterest-bearing deposits as a percent of total average deposits increased to approximately 26% during the three months ended March 31, 2010 from approximately 22% for the same period in 2009.

The net interest margin for the three months ended March 31, 2010 increased 24 basis points to 4.54%, from 4.30% for three months ended March 31, 2009. The improvement the net interest margin was primarily a result of a decrease in the cost of funds offset by a decrease in interest income as a result of a decrease in loan balances and forgone interest on non-accrual and restructured loans. Forgone interest on non-accrual and restructured loans adversely impacted the net interest margin by 93 basis points and 66 basis points for three months ended March 31, 2010 and 2009, respectively.

Interest income decreased 11.8%, or $566 thousand, to $4.2 million for the three months ended March 31, 2010, from $4.8 million for the same period in 2009. Average loans, net of deferred fees and costs, decreased by 4.2%, or $13.1 million, to $300.7 million for the three months ended March 31, 2010, from $313.8 million for the same period of 2009, and yielded 5.69% in 2010, compared to 6.19% in 2009. The yield on average loans was negatively impacted by an increase in non-accrual and restructured loans and also reflects the impact of loans that repriced during a period of declining short-term interest rates. The yield on investment securities increased to 3.24% for the three months ended March 31, 2010, from 3.15% for the same period in 2009.

Interest expense on all interest-bearing liabilities decreased 48.2%, or $619 thousand, to $665 thousand for the three months ended March 31, 2010, from $1.3 million for the same period in 2009. Total average interest-bearing liabilities decreased 4.1%, or $11.2 million, to $265.7 million for the three months ended March 31, 2010, from $276.9 million for the same period in 2009. The cost of interest-bearing liabilities decreased to 1.02% for the three months ended March 31, 2010, from 1.88% for the same period in 2009. This decrease was primarily the result of a decrease in deposit rates paid on all liabilities as a result of a lower interest rate environment and a decrease in the average balances in time certificates of deposits.

Interest expense on interest-bearing deposits decreased 56.3%, or $587 thousand, to $456 thousand for the three months ended March 31, 2010, from $1.0 million for the same period in 2009. The decrease is attributable to a decrease in deposit rates paid on all deposit types during the three months ended March 31, 2010 as a result of the interest rate environment which has been in decline since 2007. The overall cost of deposits decreased to 0.63% for the three months ended March 31, 2010, from 1.40% for same period of 2009. This overall cost differs from the cost of total interest-bearing deposits of 0.85% and 1.79% for the three months ended March 31, 2010 and 2009, respectively due to the substantial percentage of our funding sources which are noninterest-bearing demand deposits, which were 25.9% of average total deposits for the three months ended March 31, 2010, compared to 21.8% for same period of 2009. At March 31, 2010 noninterest-bearing deposits as a percent of total deposits were 26.7%, an increase over the 25.2% at December 31, 2009.

Provision for Credit Losses

The provision for credit losses, which is included in operations to support the required level of the allowance for credit losses, is based on credit experience and management’s ongoing evaluation of loan portfolio risk and economic conditions. The provision for credit losses was $11.1 million, $23.9 million and $945,000 in 2009, 2008 and 2007, respectively, and $600 thousand and $2.0 million for the three months ended March 31, 2010 and 2009,

respectively. See the sections below titled “Nonperforming Assets,” “Impaired Loans” and “Allowance for Credit Losses.”

Non-Interest Income

The following table summarizes non-interest income by category for the periods indicated:


	Year Ended December 31,

	2009			2008			2007

	(Dollars in thousands)
Service charges	$	1,360		$	1,251		$	1,031
Broker fee income		689			491			798
Gain on sale of loans		2,818			71			—
Increase in cash surrender value of life insurance		209			207			220
Other		36			120			157

Total non-interest income	$	5,112		$	2,140		$	2,206

Total non-interest income to average total assets		1.36	%		0.61	%		0.73	%

The following table summarizes non-interest income by category for the periods indicated:


	For the Three Months Ended March 31,

(Unaudited)	2010			2009

	(Dollars in thousands)
Service charges	$	341		$	338
Broker fee income		80			123
Cash surrender value of life insurance		150			52
Other		8			9

Total non-interest income	$	579		$	522

Total non-interest income to average total assets, annualized		0.66	%		0.58	%

2009 Compared to 2008

Non-interest income increased 138.9%, or $3.0 million, to $5.1 million for the year ended December 31, 2009, from $2.1 million for 2008. In 2009, we entered into a loan purchase and asset sale agreement with a private equity firm accounted for as a transfer of financial assets. This transaction included the purchase of a pool of home equity lines of credit (“HELOC”) with a fair value of $24.9 million. The HELOC portfolio was purchased in exchange for a combination of $2.4 million in carrying value of certain non-performing loans and cash of

approximately $20.1 million. We recorded a gain of $2.8 million on the transaction. There were no such transactions in 2008. Broker fee income increased 40.3%, or $198,000, as a result of an increase in the number of mortgage loan transactions completed in 2009 compared to 2008. Service charges increased 8.7%, or $109,000, as a result of an increase in deposit accounts.

2008 Compared to 2007

Non-interest income decreased 3.0%, or $66,000, to $2.1 million for the year ended December 31, 2008, from $2.2 million for 2007. The decrease in non-interest income was primarily due to a decrease in broker fee income of 38.5%, or $307,000, as a result of a decrease in commercial real estate loan transactions completed in 2008 compared to 2007. This was offset by an increase in service charges of 21.3%, or $220,000, as a result of an increase in deposit accounts and a gain on sale of loans of $71,000 in 2008. There were no loans sold in 2007.

March 31, 2010 Compared to March 31, 2009

Non-interest income increased 10.9%, or $57 thousand, to $579 thousand for the three months ended March 31, 2010, from $522 thousand for the same period in 2009. Income from the cash surrender value of life insurance increased 188.5%, or $98,000, as a result of the receipt of insurance proceeds. Broker fee income decreased 35.0%, or $43,000, as a result of a decrease in the number of mortgage loan transactions completed in 2010 compared to 2009.

Non-interest Expense

The following table summarizes non-interest expense by category for the periods indicated:


	Year Ended December 31,

	2009			2008			2007

	(Dollars in thousands)
Salaries and employee benefits	$	4,925		$	5,271		$	6,051
Occupancy and equipment		1,771			1,863			1,793
Loss on sale/writedown of other real estate owned		3,441			116			—
Regulatory fees		1,162			280			192
Outsourced data processing		1,032			969			851
Legal and accounting		596			284			214
Other real estate owned expenses		368			444			—
Miscellaneous loan expenses		323			221			96
Director compensation and retirement		267			357			294
Consulting fees		264			86			49
Postage and courier		245			242			180
Telephone		238			241			216
Advertising and marketing		223			296			330
Stationery and supplies		193			217			269
Correspondent banking fees		32			131			124
Other operating expenses		611			635			583

Total non-interest expense	$	15,691		$	11,653		$	11,242

Total non-interest expense to average total assets		4.17	%		3.32	%		3.71	%

The following table summarizes non-interest expense by category for the periods indicated:


	For the Three Months Ended March 31,

(Unaudited)	2010			2009

	(Dollars in thousands)
Salaries and employee benefits	$	1,489		$	1,332
Occupancy and equipment		451			443
Regulatory fees		300			209
Outsourced data processing		266			254
Legal and accounting		149			139
Telephone		87			55
Other real estate owned expenses		77			95
Postage and courier		64			56
Director compensation and retirement		56			72
Stationery and supplies		50			46
Miscellaneous loan expenses		41			82
Consulting fees		29			13
Advertising and marketing		28			71
Loss on sale/writedown of other real estate owned		—			1,538
Other operating expenses		106			166

Total non-interest expense	$	3,193		$	4,571

Total non-interest expense to average total assets, annualized		3.65	%		5.05	%

2009 Compared to 2008

Non-interest expense increased 34.6%, or $4.0 million, to $15.7 million for the year ended December 31, 2009, from $11.7 million for 2008.

Salaries and employee benefits decreased 6.6%, or $346,000, to $4.9 million for the year ended December 31, 2009, from $5.3 million for 2008 primarily as a result of the reversal of $790,000 in salary continuation accruals for employees whose employment terminated prior to their scheduled retirement dates. This was offset by an increase in salaries and commission expenses of $195,000 and temporary labor costs of $127,000 and a decrease in deferred loan costs of $180,000 as a result of a decrease in the number of loans boarded during 2009 compared to 2008. Deferred loan costs reduce salaries expense in the period in which the loan is boarded.

Occupancy and equipment expense decreased 4.9%, or $92,000, to $1.8 million for the year ended December 31, 2009, from $1.9 million for 2008 primarily as a result of a decrease in depreciation, common area maintenance and tax expenses.

Loss on sale/writedown of other real estate owned increased 2,866.4%, or $3.3 million, to $3.4 million for the year ended December 31, 2009, from $116,000 for 2008 primarily as a result of the significant decline in real estate values, specifically, real estate that served as collateral on construction and land development loans in Nevada and Placer counties throughout 2009. See additional discussion below titled “Nonperforming Assets.”

Regulatory fees increased 315%, or $882,000, to $1.2 million for the year ended December 31, 2009, from $280,000 for 2008 as a result of increased assessment rates on deposits and a $177,000 special assessment by the FDIC in 2009.

Legal and accounting expenses increased 109.9%, or $312,000, to $596,000 for the year ended December 31, 2009, from $284,000 for 2008 primarily as a result of the restatement of our 2008 financial statements, and other professional services required to manage the increased level of nonperforming assets.

2008 Compared to 2007

Non-interest expense increased 3.7%, or $411,000, to $11.7 million for the year ended December 31, 2008, from $11.2 million for 2007.

Salaries and employee benefits decreased 12.9%, or $780,000, to $5.3 million for the year ended December 31, 2008, from $6.1 million for 2007 primarily as a result of no bonuses being accrued in 2008 compared to $419,000 in 2007 and a decrease in salaries and commission expenses of $428,000 primarily as a result of a decrease in the number of employees.

Occupancy and equipment expense increased 3.9%, or $70,000, to $1.9 million for the year ended December 31, 2008, from $1.8 million for 2007 primarily as a result of an increase in rent and common area maintenance expenses.

Other real estate owned expenses were $444,000 for the year ended December 31, 2008. We did not own other real estate during the year ended December 31, 2007.

March 31, 2010 Compared to March 31, 2009

Non-interest expense decreased 30.1%, or $1.4 million, to $3.2 million for the three months ended March 31, 2010, from $4.6 million for the same period of 2009.

Salaries and employee benefits increased 11.8%, or $157,000, to $1.5 million for the three months ended March 31, 2010, from $1.3 million for same period of 2009 primarily as a result of an increase in salaries and commission expenses of $40 thousand and temporary labor costs of $90 thousand and a decrease in deferred loan costs of $90 thousand as a result of a decrease in the number of loans boarded during 2010 compared to 2009. Deferred loan costs

reduce salaries expense in the period in which the loan is boarded. This was offset by a decrease in salary continuation expense of $55 thousand and stock option expense of $5 thousand.

Regulatory fees increased 43.5%, or $91 thousand, to $300 thousand for the three months ended March 31, 2010, from $209 thousand for the same period of 2009 as a result of increased assessment rates on deposits.

During the three months ended March 31, 2009, we recorded $1.5 million in losses on sale/writedown of other real estate owned primarily as a result of the significant decline in real estate values, specifically, real estate that served as collateral on construction and land development loans in Nevada and Placer counties throughout 2009. See additional discussion below titled “Nonperforming Assets.” We did not record any losses on sale/writedown of other real estate owned during the three months ended March 31, 2010 due to the stabilization of real estate prices during the period

Provision for Income Taxes

For the years ended December 31, 2009 and 2008, we are in a cumulative pretax loss position and have an accumulated deficit as of December 31, 2009 and March 31, 2010. For purposes of establishing a deferred tax valuation allowance, this cumulative pretax loss position and accumulated deficit is considered significant, objective evidence that we may not be able to realize deferred tax assets in the future. The cumulative pretax loss position and resulting accumulated deficit were caused primarily by the significant amount of loan loss provision and other real estate expense taken in 2008 and 2009. As a result of these losses, a full valuation allowance has been recorded to eliminate our net deferred tax asset. Due to continued deteriorating market conditions, we have determined that there is not sufficient additional positive evidence to support the realization of the net deferred tax assets. Recording a full valuation allowance has resulted in a significant difference between the statutory tax rate and the actual tax rate. In future periods, the valuation allowance could be reduced based on sufficient evidence indicating that it is “more likely than not” that a portion or all of our deferred tax assets will be realized.

Inflation

The impact of inflation on the banking industry differs significantly from that of other industries in which a large portion of total resources are invested in fixed assets such as property, plant and equipment.

Assets and liabilities of financial institutions are virtually all monetary in nature, and therefore are primarily impacted by interest rates rather than changing prices. While the general level of inflation underlies most interest rates, interest rates react more to changes in the expected rate of inflation and to changes in monetary and fiscal policy. Net interest income and the interest rate spread are good measures of our ability to react to changing interest rates and are discussed in further detail in the section entitled “Results of Operations.”

Financial Condition

Our total assets at December 31, 2009 were $371.1 million, an increase of 2.1%, compared to $363.3 million at December 31, 2008. Our earning assets at December 31, 2009 totaled $361.8 million, an increase of 6.6%, compared to $339.3 million at December 31, 2008. Total deposits at December 31, 2009 were $302.6 million, an increase of 1.0%, compared to $299.8 million at December 31, 2008.

Our total assets at March 31, 2010 were $338.4 million, a decrease of 8.8%, compared to $371.1 million at December 31, 2009. Our earning assets at March 31, 2010 totaled $329.4 million, a decrease of 9.0%, compared to $361.8 million at December 31, 2009. Total deposits at March 31, 2010 were $283.6 million, a decrease of 6.3%, compared to $302.6 million at December 31, 2009.

Loan Portfolio

Management continues to manage the mix of its loan portfolio consistent with our identity as a community bank serving the financing needs of all sectors of the areas we serve. Although we offer a broad array of financing options, we continue to concentrate our focus on small- to medium-sized commercial businesses. We offer both fixed and floating rate loans and obtain collateral in the form of real property, business assets and deposit accounts, but look to business and personal cash flows as the primary source of repayment.

We generally concentrate our lending activities in the following categories: commercial; residential real estate; commercial real estate; real estate construction (both commercial and residential); and consumer.

The following table presents the balance of each major category of loans outstanding at the end of each of the years indicated:


	Year Ended December 31,

	2009			2008			2007			2006			2005

	(Dollars in thousands)
Commercial	$	43,461		$	50,782		$	55,395		$	38,865		$	27,442
Real estate - residential		69,533			47,679			44,793			38,743			34,733
Real estate -nonresidential		145,719			145,878			126,148			102,814			84,969
Real estate - construction		40,794			62,319			71,940			73,798			54,952
Consumer		5,238			5,815			7,124			5,553			5,007

		304,745			312,473			305,400			259,773			207,103
Deferred loan origination fees, net		(6	)		(99	)		(265	)		(392	)		(443	)
Allowance for credit losses		(14,387	)		(12,406	)		(3,919	)		(3,374	)		(2,826	)

Total net loans	$	290,352		$	299,968		$	301,216		$	256,007		$	203,834

Gross loans decreased 2.5%, or $7.7 million, to $304.7 million at December 31, 2009, from $312.5 million at December 31, 2008. We experienced decreases of $7.3 million in commercial, $159,000 in nonresidential real estate, $21.5 million in real estate construction and $577,000 in consumer loans partially offset by an increase of $21.9 million in residential real estate loans. In October 2009, we entered into a mortgage loan purchase and asset sale which included the purchase of a pool of HELOC in exchange for certain nonperforming loans and cash. The HELOC purchased had a fair value of $24.9 million. During the year ended December 31, 2009, loan balances were decreased by $9.1 million in net charge-offs and an additional $7.5 million by the conversion of property to other real estate owned through judicial or other foreclosure. As of December 31, 2009, three borrowers each represented over 2% of total loans.

The following table shows the amount of loans outstanding as of December 31, 2009 which, based on scheduled repayments of principal are due in one year or less, more than one year through five years, and more than five years. Demand or other loans having no stated maturity and no stated schedule of repayments are reported as due in one year or less.


	Maturity

	One Year or Less		One through Five Years		Over Five Years		Total

	(Dollars in thousands)
Total Loans	$	66,465	$	39,104	$	199,176	$	304,745

The rates of interest charged on variable rate loans are set at specific increments in relation to our lending rate or other indexes such as the published prime interest rate or U.S. Treasury rates and vary with changes in these indices. At December 31, 2009 and 2008, approximately $203.4 million, or 66.7% and $206.2 million, or 66.0%, respectively, of the loan portfolio was comprised of variable rate loans. While real estate mortgage, commercial and consumer lending remain the foundation of our historical loan mix, some changes in the mix have occurred due to the changing economic environment and the resulting change in demand for certain loan types.

In 2008, the Bank recorded a provision for credit losses of $23.9 million related to the overall trends in credit quality of its loan portfolio, including an increase in the number and amount of classified and past due loans and deterioration in the general economic environment in our primary market areas, not unlike other areas in California and in the country. Also in 2008, the Bank recorded $15.4 million in charge-offs, net of recoveries, or 4.87% of average loans. At December 31, 2008, the Bank had non-performing assets of $41.8 million, or 10.8% of total assets.

The Bank was aggressive in 2009 in executing a strategy to proactively identify problem loans, quantify impairment if any, and develop resolution plans suitable for each, which required a comprehensive loan-by-loan review. In 2009, the Bank recorded additional loan loss provisions of $11.1 million to cover potential losses in the portfolio. In 2009, the Bank recorded $9.1 million of charge-offs, net of recoveries, or 2.94% of average loans. At December 31, 2009, the Bank had non-performing assets of $31.9 million, or 8.6% of total assets. Non-performing assets includes non-accrual loans, accruing loans that are past due 90 days or more and OREO.

The Bank’s construction and land development loans have been the primary source of the losses that have occurred in the two years ended December 31, 2009. During this two-year period, net charge-offs of construction and land development loans totaled $14.7 million, or 59.8% of net charge-offs of $24.5 million. During 2009, we have significantly reduced our exposure to these loans as demonstrated by a decline in loan balances in this portfolio of $21.5 million from $62.3 million at December 31, 2008 to $40.8 million at December 31, 2009. The remaining balance in that category as of December 31, 2009 is deemed to be well collateralized based on current values.

The Bank’s commercial real estate portfolio continues to perform. Loan-to-values, or the collateral values in this portfolio compared to the loans they secure, are currently sufficient to minimize the potential losses in this category in the near future.

The following table presents the balance of each major category of loans outstanding at the end of each of the periods indicated:


	As of March 31, 2010						As of December 31, 2009

	Amount			% of Loans			Amount			% of Loans

	(Dollars in thousands)
Commercial	$	34,472			11.6	%	$	43,461			14.3	%
Real estate - residential		68,934			23.2	%		69,533			22.8	%
Real estate - nonresidential		147,142			49.7	%		145,719			47.8	%
Real estate - construction		41,017			13.8	%		40,794			13.4	%
Consumer		5,040			1.7	%		5,238			1.7	%

Total gross loans		296,605			100.0	%		304,745			100.0	%
Deferred loan origination costs (fees), net		19						(6	)
Allowance for credit losses		(13,561	)					(14,387	)

Total net loans	$	283,063					$	290,352

Gross loans decreased 2.7%, or $8.1 million, to $296.6 million at March 31, 2010, from $304.7 million at December 31, 2009. We experienced decreases of $9.0 million in commercial, $599 thousand in residential real estate and $198 thousand in consumer loans partially offset by an increase of $1.4 million in nonresidential real estate and $223 thousand in real estate construction loans. During the three months ended March 31, 2010, loan balances were decreased by $1.4 million in net charge-offs. As of March 31, 2010, three borrowers each represented over 2% of total loans.

During the three months ended March 31, 2010, the Bank continued to be proactive in identifying problem loans, quantifying impairment if any, and developing resolution plans suitable for each, which required a comprehensive loan-by-loan review. During the three months ended March 31, 2010, the Bank recorded additional loan loss provisions of $600 thousand to cover potential losses in the portfolio, compared to $2.0 million for the three months ended March 31, 2009. During the three months ended March 31, 2010, the Bank recorded $1.4 million in charge-offs, net of recoveries, or 0.47% of average loans, compared to $596 thousand, or 0.19% of average loans, for the three months ended March 31, 2009. At March 31, 2010, the Bank had non-performing assets of $37.7 million, or 11.2% of total assets. At December 31, 2009, the Bank had non-performing assets of $31.9 million, or 8.6% of total assets. Non-performing assets includes non-accrual loans, accruing loans that are past due 90 days or more and OREO.

Non-Performing Assets

Generally, loans are placed on nonaccrual status when they become 90 days or more past due unless the loan is well secured and in the process of collection. A loan is considered to be in the process of collection if, based on a probable specific event, it is expected that the loan will be repaid or brought current. Generally, this collection period would not exceed 90 days. When a

loan is placed on nonaccrual status the Company’s general policy is to reverse and charge against current income previously accrued but unpaid interest. Interest income on such loans is subsequently recognized only to the extent that cash is received and future collection of principal is deemed by management to be probable. Where the collectibility of the principal or interest on a loan is considered to be doubtful by management, it is generally placed on nonaccrual status prior to becoming 90 days delinquent.

The Bank has worked with a number of borrowers to implement a restructuring of their loans with solutions that are believed to be beneficial to both the borrower and to the Bank. This restructuring may allow the borrower to stay with their property and operate their business through the difficult economic times. In the short-term, we may benefit from the cash flows generated by the borrower’s performance under the restructured terms. As these borrowers continue to perform under the restructured terms of their loans, these loans should begin to migrate back to performing status.

Restructured loans are loans on which, due to the borrower’s financial difficulties, we have granted a concession that we would not otherwise consider. This may include a transfer of real estate or other assets from the borrower, a modification of loan terms, or a combination of the two. Modifications of terms that could potentially qualify as a restructuring include reduction of contractual interest rate, extension of the maturity date at a contractual interest rate lower than the current rate for new debt with similar risk, or a reduction of the face amount of debt, which could include either forgiveness of principal or accrued interest. A loan continues to qualify as restructured until a consistent payment history has been evidenced, generally no less than six months. As of December 31, 2009 and 2008, there were 24 restructured loans totaling $22.5 million and 5 restructured loans totaling $2.3 million, respectively. Of the restructured loans at December 31, 2009, $13.3 million were on accrual status. As of December 31, 2009, 3 restructured loans totaling $1.5 million were not performing in accordance with their modified terms. As of March 31, 2010, there were 28 restructured loans totaling $24.1 million. Of the restructured loans at March 31, 2010, $13.2 million were on accrual status. As of March 31, 2010, 8 restructured loans totaling $4.8 million were not performing in accordance with their modified terms.

Potential problem loans consist of loans that are performing in accordance with contractual terms, but for which we have concerns about the borrower’s ability to comply with repayment terms because of the borrower’s potential financial difficulties. We monitor these loans closely and review their performance on a regular basis. At March 31, 2010, December 31, 2009 and 2008, we had $18.6 million, $32.1 million and $12.9 million, respectively, in loans of this type, which were not included in either the nonaccrual or 90 days past due categories. The increase in the amount of potential problem loans from 2008 to 2009 is consistent with the overall economic deterioration and the increase in non-performing and restructured loans that we experienced during the year. In response to this increase, during 2009, we have dedicated additional resources and will continue our proactive approach to managing our problem loans. The decrease in the amount of potential problem loans from December 31, 2009 to March 31, 2010 is primarily due the migration of performing problem loans into nonaccrual status during the period.

In some cases, the best resolution for the Bank on certain real estate secured loans required the Bank to foreclose on the real estate collateral. The successful foreclosure process allows the Bank to market and sell the property in an effort to maximize recovery of the legal balances owed. The Bank has had a number of sales of OREO properties maximizing the recovery efforts.

The following table summarizes the loans for which the accrual of interest has been discontinued, loans more than 90 days past due and still accruing interest, loans that have been restructured and other real estate owned, which we refer to as OREO:


	Year Ended December 31,

	2009			2008			2007			2006			2005

	(Dollars in thousands)

Nonaccrual loans	$	24,882		$	27,851		$	9,474		$	—		$	—
Accruing loans past due 90 day or more		2,396			—			—			—			—

Total non-performing loans (NPLs)		27,278			27,851			9,474			—			—
OREO		4,650			6,195			—			—			—

Total nonperforming assets (NPAs)		31,928			34,046			9,474			—			—
Restructured loans, not included above		13,325			521			—			—			—

Total non-performing assets and restructured loans (NPARs)	$	45,253		$	34,567		$	9,474		$	—		$	—


Selected ratios:
NPLs to total loans		8.95	%		8.92	%		3.10	%		0.00	%		0.00	%
NPAs to total loans and OREO		10.32	%		10.69	%		3.10	%		0.00	%		0.00	%
NPAs to total assets		8.60	%		9.37	%		2.88	%		0.00	%		0.00	%
NPARs to total assets		12.20	%		9.52	%		2.88	%		0.00	%		0.00	%

Non-performing assets at December 31, 2009 were $31.9 million, a decrease of $2.1 million from the $34.0 million balance at December 31, 2008. This decrease was primarily a result of a decrease in the balance of OREO to $4.7 million at December 31, 2009 compared to $6.2 million at December 31, 2008. Non-performing and restructured loans at December 31, 2009 were $40.6 million, an increase of $12.2 million from the $28.4 million balance at December 31, 2008. Non-performing and restructured loans at December 31, 2009 consisted of 59 loans, 15 of which have individual principal balances in excess of $1 million. These 15 loans, all of which are impaired and are secured primarily by real estate, have a total principal balance at December 31, 2009 of $31.2 million and specific reserves of $1.9 million.

Interest foregone on nonaccrual loans was $1.8 million during 2009, $1.0 million during 2008, and $0.3 million during 2007. In 2009, 2008 and 2007, no interest income was recognized from payments received on nonaccrual loans.


(Unaudited)	As of March 31, 2010			As of December 31, 2009

	(Dollars in thousands)
Nonaccrual loans	$	31,147		$	24,882
Accruing loans past due 90 day or more		2,125			2,396

Total non-performing loans (NPLs)		33,272			27,278
OREO		4,453			4,650

Total nonperforming assets (NPAs)		37,725			31,928
Restructured loans, not included above		13,238			13,325

Total non-performing assets and restructured loans (NPARs)	$	50,963		$	45,253


Selected ratios:
NPLs to total loans		11.22	%		8.95	%
NPAs to total assets		11.15	%		8.60	%
NPARs to total assets		15.06	%		12.20	%

Non-performing assets at March 31, 2010 were $37.7 million, an increase of $5.8 million from the $31.9 million balance at December 31, 2009. This increase was primarily a result of an increase in nonaccrual loans as of March 31, 2010 compared to December 31, 2009. Non-performing and restructured loans at March 31, 2010 were $46.5 million, an increase of $5.9 million from the $40.6 million balance at December 31, 2009. Non-performing and restructured loans at March 31, 2010 consisted of 64 loans, 17 of which have individual principal balances in excess of $1 million. These 17 loans, all of which are impaired and are secured primarily by real estate, have a total principal balance at March 31, 2010 of $35.0 million and specific reserves of $3.1 million.

Interest foregone on nonaccrual loans was $464 thousand and $545 thousand for the three months ended March 31, 2010 and 2009, respectively. During the three months ended March 31, 2010, the Company recognized $25 thousand in interest income on a cash basis for impaired loans. During the three months ended March 31, 2009, the Company did not recognize any interest income on a cash basis for impaired loans.

Impaired Loans

Impaired loans are loans for which it is probable that we will not be able to collect all amounts due including principal and interest according to the original contractual terms of the loan agreement. The category of impaired loans is not the same as the category of non-accrual loans, although the two categories overlap. Non-accrual loans are those loans on which the accrual of interest is discontinued when collectibility of principal and interest is uncertain or payments of principal or interest have become contractually past due 90 days or more. Management may choose to place a loan on non-accrual status due to payment delinquency or when the collectibility of principal is in doubt.

In determining whether or not a loan is impaired, we apply our normal loan review procedures on a case-by-case basis taking into consideration the circumstances surrounding the loan and borrower, including the collateral value, the reasons for the delay, the borrower’s prior payment record, the amount of the shortfall in relation to the principal and interest owed and the length of the delay. We measure impairment on a loan-by-loan basis using either the present value of expected future cash flows discounted at the loan’s effective interest rate or at the fair value of the collateral if the loan is collateral dependent, less estimated selling costs. Loans for which an insignificant delay in the collection of payments is anticipated, but where we expect to collect all amounts due, are not considered impaired.

The recorded investment in loans that were considered to be impaired totaled $58.6 million, $58.7 million and $36.1 million at March 31, 2010, December 31, 2009 and 2008, respectively. The related allowance for credit losses for impaired loans was $5.9 million, $5.2 million and $3.4 million at March 31, 2010, December 31, 2009 and 2008, respectively. During the years ended December 31, 2009, 2008 and 2007 we did not recognize any interest income on a cash basis for impaired loans.

Included in impaired loans are troubled debt restructurings. A troubled debt restructuring is a formal restructure of a loan where the Company for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower. The concessions may be granted in various forms, including reduction in the standard interest rate, reduction in the loan balance or accrued interest, and extension of the maturity date. As of March 31, 2010, the Company has $164,000 of commitments to lend additional funds to debtors owing receivables whose terms have been modified in troubled debt restructurings.

At March 31, 2010, all loans which management had serious doubts as to the collectibility of principal or were past due greater than 90 days, and not well secured and in the process of collection were classified as non-accrual.

Allowance for Credit Losses

The allowance for credit losses is established through charges to earnings in the form of the provision for credit losses. Loan losses are charged to and recoveries are credited to the allowance for credit losses. The allowance for credit losses is maintained at a level deemed appropriate by management to provide for known and inherent risks in loans. The adequacy of the allowance for credit losses is based upon management’s continuing assessment of various factors affecting the collectibility of loans, including current economic conditions, maturity of the portfolio, size of the portfolio, industry concentrations, borrower credit history, collateral, the

existing allowance for credit losses, independent credit reviews, current charges and recoveries to the allowance for credit losses and the overall quality of the portfolio as determined by management, regulatory agencies, and independent credit review consultants. There is no precise method of predicting specific losses or amounts which may ultimately be charged off on particular segments of the loan portfolio. The collectibility of a loan is subjective to some degree, but must relate to the borrower’s financial condition, cash flow, quality of the borrower’s management expertise, collateral and guarantees, and state of the local economy.

The federal financial regulatory agencies in December 2006 issued a new interagency policy statement on the allowance for credit losses along with supplemental frequently asked questions. When determining the adequacy of the allowance for credit losses, management follows these guidelines. The policy statement revises and replaces a 1993 policy statement on the allowance for credit losses. The agencies issued the revised policy statement in view of today’s uncertain economic environment and the presence of concentrations in untested loan products in the loan portfolios of insured depository institutions. The policy statement has also been revised to conform with GAAP and post-1993 supervisory guidance. The policy statement reiterates that each institution has a responsibility for developing, maintaining and documenting a comprehensive, systematic, and consistently applied process appropriate to its size and the nature, scope, and risk of its lending activities for determining the amounts of the allowance for credit losses and the provision for loan and lease losses and states that each institution should ensure controls are in place to consistently determine the allowance for credit losses in accordance with GAAP, the institution’s stated policies and procedures, management’s best judgment and relevant supervisory guidance.

The policy statement also restates that insured depository institutions must maintain an allowance for credit losses at a level that is appropriate to cover estimated credit losses on individually evaluated loans determined to be impaired as well as estimated credit losses inherent in the remainder of the loan and lease portfolio, and that estimates of credit losses should reflect consideration of all significant factors that affect the collectibility of the portfolio as of the evaluation date. The policy statement states that prudent, conservative, but not excessive, loan loss allowances that represent management’s best estimate from within an acceptable range of estimated losses are appropriate.

The Company’s methodology for assessing the adequacy of the allowance for credit losses consists of several key elements, which include but are not limited to:


	•	specific allocation for problem graded loans (“impaired loans”),

	•	general or formula allocation, and

	•	discretionary allocation based on loan portfolio segmentation.

Specific allocations are established based on management’s periodic evaluation of loss exposure inherent in classified, impaired, and other loans in which management believes that the collection of principal and interest under the original terms of the loan agreement are in question. For purposes of this analysis, classified loans are grouped by internal risk classifications which are “special mention”, “substandard”, “doubtful” and “loss”. Special mention loans are currently performing but are potentially weak, as the borrower has begun to exhibit deteriorating trends,

which if not corrected, could jeopardize repayment of the loan and result in further downgrade. Substandard loans have well-defined weaknesses which, if not corrected, could jeopardize the full satisfaction of the debt. A loan classified as “doubtful” has critical weaknesses that make full collection of the obligation improbable. Classified loans, as defined by the Company, include loans categorized as substandard and doubtful. Loans classified as loss are immediately charged off.

Formula allocations are calculated by applying loss factors to outstanding loans with similar characteristics. Loss factors are based on our historical loss experience over the past three years, as adjusted for changes in the business cycle and on the internal risk grade of those loans and may be adjusted for significant factors that, in management’s judgment, affect the collectibility of the portfolio as of the evaluation date.

The discretionary allocation is based upon management’s evaluation of various loan segment conditions that are not directly measured in the determination of the formula and specific allowances. The conditions may include, but are not limited to, general economic and business conditions affecting the key lending areas of the Company, credit quality trends, collateral values, loan volumes and concentrations, and other business conditions.

The following table provides certain information for the years indicated with respect to the Company’s allowance for credit losses as well as charge-off and recovery activity.


	As of or for the Year Ended December 31,

	2009			2008			2007			2006			2005

Beginning balance	$	12,406		$	3,919		$	3,374		$	2,826		$	1,988
Loans charged off during period:
Commercial		806			6,718			30			10			8
Real estate - residential		253			368			41			—			—
Real estate - nonresidential		171			360			38			—			—
Real estate - construction		7,656			7,053			289			—			—
Consumer		596			1,010			2			2			—

Total		9,482			15,509			400			12			8

Recoveries:
Commercial		57			27			—			—			1
Real estate - residential		—			—			—			—			—
Real estate - nonresidential		157			—			—			—			—
Real estate - construction		23			—			—			—			—
Consumer		111			69			—			—			—

Total		348			96			—			—			1

Net loans charged off		(9,134	)		(15,413	)		(400	)		(12	)		(7	)
Provision for credit losses		11,115			23,900			945			560			845

Ending balance	$	14,387		$	12,406		$	3,919		$	3,374		$	2,826

Total loans, net of fees and costs	$	304,739		$	312,374		$	305,135		$	259,381		$	206,659
Average loans	$	310,253		$	316,500		$	279,221		$	236,034		$	197,536
Non-performing loans	$	27,278		$	27,850		$	9,474		$	—		$	—

Selected ratios:
Net charge-offs to average loans		2.94	%		4.87	%		0.14	%		0.01	%		0.00	%
Provision for credit losses to average loans		3.58	%		7.55	%		0.34	%		0.24	%		0.43	%
Allowance for credit losses to total loans		4.72	%		3.97	%		1.28	%		1.30	%		1.37	%
Allowance for credit losses to non-performing loans		52.74	%		44.55	%		41.37	%		N/A			N/A

The allowance for credit losses totaled $14.4 million or 4.72% of total loans at December 31, 2009 compared to $12.4 million or 3.97% at December 31, 2008, and $3.9 million or 1.28% at December 31, 2007. We recorded a loan loss provision of $11.1 million, $23.9 million and $945,000 for the years ended December 31, 2009, 2008 and 2007, respectively. The provisions recorded during 2009 and 2008 related to the overall trends in credit quality of our loan portfolio including an increase in the number and amount of classified and past due loans and deterioration in the general economic environment in our primary market area. Management believes that the allowance for credit losses was adequate at December 31, 2009. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

Construction and land development loans are highly dependent on property values both in terms of the likelihood of repayment once the property is developed by the current owner as well as the level of collateral the Company has securing the loan in the event of default. Loans in this category are characterized by the speculative nature of commercial and residential development properties and can include property in various stages of development from raw land to finished buildings.

In allocating our allowance for credit losses, management has considered the credit risk in the various loan categories in the Bank’s portfolio. As such, the allocations of the allowance for credit losses are based upon average historical net loan loss experience and the other factors discussed above. While every effort has been made to allocate the allowance to specific categories of loans, management believes that any allocation of the allowance for credit losses into loan categories lends an appearance of exactness that does not exist. The following tables indicate management’s allocation of the allowance and the percent of loans in each category to total loans as of each of the following dates. The allocated and unallocated portions of the allowance for credit losses are available to the entire loan portfolio. In 2009, management increased the unallocated amount of the allowance due to the significant decline in the value of real estate collateral during the year and the potential for increased risk in the portfolio relating to the economic and regulatory environment.

Allocation of the Allowance:


	As of December 31,

	2009		2008		2007		2006		2005

Commercial	$	3,825	$	3,908	$	508	$	617	$	862
Real estate - residential		1,992		1,262		436		294		225
Real estate - nonresidential		3,449		1,832		1,066		958		852
Real estate - construction		4,205		4,762		1,598		1,207		650
Consumer		527		483		62		180		125
Unallocated		389		159		249		118		112

Total	$	14,387	$	12,406	$	3,919	$	3,374	$	2,826

Percent of Loans in Each Category to Total Loans:


	As of December 31,

	2009			2008			2007			2006			2005

Commercial		14.3	%		16.2	%		18.2	%		15.0	%		13.3	%
Real estate - residential		22.8	%		15.3	%		14.7	%		14.9	%		16.8	%
Real estate - nonresidential		47.8	%		46.6	%		41.2	%		39.6	%		41.0	%
Real estate - construction		13.4	%		20.0	%		23.6	%		28.4	%		26.5	%
Consumer		1.7	%		1.9	%		2.3	%		2.1	%		2.4	%

Total		100.0	%		100.0	%		100.0	%		100.0	%		100.0	%

The allowance for credit losses totaled $13.6 million or 4.57% of total loans at March 31, 2010 compared to $14.4 million or 4.72% at December 31, 2009. We recorded a loan loss provision of $600 thousand and $2.0 million for the three months ended March 31, 2010 and 2009, respectively. The provisions recorded during 2010 and 2009 related to the overall trends in credit quality of our loan portfolio including an increase in the number and amount of classified and past due loans and deterioration in the general economic environment in our primary market area. Management believes that the allowance for credit losses was adequate at March 31, 2010. However, no prediction of the ultimate level of loans charged off in future years can be made with any certainty.

The following table provides certain information for the years indicated with respect to the Company’s allowance for credit losses as well as charge-off and recovery activity.


	As of or For the Three Months Ended March 31,

	2010			2009

	(Dollars in thousands)
Beginning balance	$	14,387		$	12,406
Loans charged off during period:
Commercial		1,328			2
Real estate - residential		—			—
Real estate - nonresidential		—			171
Real estate - construction		189			203
Consumer		13			399

Total		1,530			775

Recoveries:
Commercial		71			45
Real estate - residential		33			—
Real estate - nonresidential		—			—
Real estate - construction		—			23
Consumer		—			111

Total		104			179

Net loans charged off		1,426			596
Provision for credit losses		600			2,000

Ending balance	$	13,561		$	13,810


Total loans, net of fees and costs	$	296,623		$	315,252
Average loans	$	300,681		$	313,813
Non-performing loans	$	33,272		$	24,130

Selected ratios:
Net charge-offs to average loans		(1.92%	)		(0.77%	)
Provision for credit losses to average loans		0.81	%		2.58	%
Allowance for credit losses to total loans		4.57	%		4.38	%
Allowance for credit losses to non-performing loans		40.76	%		57.23	%

Investment Securities Available-for-Sale

The carrying value of our investment securities available-for-sale at December 31, 2009 increased 34.5%, or $401,000, to $1.6 million, from $1.2 million at December 31, 2008 and 20.5%, or $266,000, from $1.3 million from December 31, 2007. Our portfolio of securities consisted of U.S. Government agency debt securities. As of December 31, 2009, securities with

a current fair value of $531,000, $530,000 and $500,000 were scheduled to mature on November 9, 2011, December 19, 2011 and January 12, 2012, respectively.

The carrying value of our investment securities available-for-sale at March 31, 2010 increased 40.3%, or $630,000, to $2.2 million, from $1.6 million at December 31, 2009. Our portfolio of securities consisted of U.S. Government and U.S. Government agency debt securities. As of March 31, 2010, securities with a current fair value of $527,000, $526,000 and $1,139,000 were scheduled to mature on November 9, 2011, December 19, 2011 and April 1, 2029, respectively.

Other Real Estate Owned

We record OREO properties at amounts which are approximately equal to the fair market value of the properties based on current independent appraisals reduced by estimated selling costs. A valuation allowance for losses on OREO is maintained to provide for temporary declines in value. The allowance is established through a provision for losses on OREO which is included in other non-interest expense. Subsequent gains or losses on sales or write-downs resulting from permanent impairments are recorded in other income or expense as incurred. Our investment in OREO holdings, all of which were related to real estate acquired in full or partial settlement of loan obligations, was $4.6 million, net of a valuation allowance of $1.6 million at March 31, 2010 and December 31, 2009. At December 31, 2008, our investment in OREO holdings was $6.2 million, net of a valuation allowance of $36,000.

Deposits

Deposits represent the Bank’s primary source of funds. Deposits are primarily core deposits in that they are demand, savings and time deposits generated from local businesses and individuals. These sources are considered to be relatively stable, long-term relationships thereby enhancing steady growth of the deposit base without major fluctuations in overall deposit balances. We experience, to a small degree, some seasonality with the slower growth period between November through April, and the higher growth period from May through October.

Average total deposits increased 7.0%, or $20.1 million, to $308.0 million for the year ended December 31, 2009, from $287.9 million for 2008. Average total deposits for the three months ended March 31, 2010 were $293.1 million. We have utilized brokered deposits since 2005 as a way of diversifying our funding sources. Based on the Bank’s capital levels, the use of this funding source is not currently permitted. Total brokered deposits at March 31, 2010 and December 31, 2009, 2008 and 2007 were $6.0 million, $9.2 million, $38.3 million and $21.9 million, respectively. Average brokered deposits were $22.7 million, $36.7 million and $16.3 million for the years ended December 31, 2009, 2008 and 2007, respectively. Average brokered deposits for the three months ended March 31, 2010 were $6.3 million.

Total deposits increased 1.0%, or $2.9 million, to $302.6 million at December 31, 2009, from $299.8 million at December 31, 2008. Total deposits decreased 6.3%, or $19.0 million, to $283.6 million at March 31, 2010 from $302.6 million at December 31, 2009. If the brokered time deposits are excluded, total deposits at December 31, 2009 increased by 12.2% or $32.0 million from December 31, 2008. If the brokered time deposits are excluded, total deposits at

March 31, 2010 decreased by 5.4% or $15.9 million from December 31, 2009. As of December 31, 2009 and March 31, 2010, one depositor represented 2.9% of total deposits.

The following table shows the average amount and average rate paid on the categories of deposits for each of the periods indicated:


	Year Ended December 31,

	2009					2008					2007

	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate

	(dollars in thousands)
Interest-bearing demand	$	39,073		0.02	%	$	34,547		0.03	%	$	28,314		0.37	%

Money market		59,143		1.22			60,586		2.34			54,624		3.04

Savings		16,953		0.40			13,634		0.53			11,910		0.94
Time certificates of deposit		120,464		2.02			112,194		3.52			96,695		4.98
Non-interest bearing deposits		72,397		—			66,933		—			65,860		—


Total	$	308,030		1.05	%	$	287,894		1.89	%	$	257,403		2.60	%

The following table shows the maturities of time certificates of deposit of $100,000 or more at December 31, 2009:


	December 31, 2009

	(dollars in thousands)
Due in three months or less	$	18,049
Due in over three months through six months		21,692
Due in over six months through twelve months		3,568
Due in over twelve months		737

Total	$	44,046

Other Borrowed Funds

Other borrowings outstanding as of December 31, 2009 consist of advances from the Federal Home Loan Bank (“FHLB”). The following table summarizes these borrowings:


	As of December 31,

	2009					2008					2007

	Amount		Rate			Amount		Rate			Amount		Rate

	(Dollars in thousands)
Short-term:

FHLB advances	$	25,000		1.05	%	$	8,000		1.07	%	$	13,500		4.46	%

Long-term:

FHLB advances	$	15,000		1.89	%	$	15,000		2.30	%		—		0.00	%


	As of March 31, 2010

	Amount		Rate

	(Dollars in thousands)
Short-term:
FHLB advances	$	21,000		1.43	%
Long-term:
FHLB advances	$	5,000		1.20	%

The maximum amount of short-term borrowings outstanding at any month-end during 2009, 2008 and 2007, was $25.0 million, $10.0 million, and $15.0 million, respectively. The FHLB advances are collateralized by loans pledged to the FHLB. Short-term borrowings as of December 31, 2009 mature between January 2010 and October 2010. Long-term borrowings as of December 31, 2009 mature between January 2011 and October 2011. Short-term borrowings as of March 31, 2010 mature between June 2010 and March 2011. Long-term borrowings as of March 31, 2010 mature in October 2011.

The Company has also been issued a total of $3.5 million as of March 31, 2010 and December 31, 2009 and $5.0 million as of December 31, 2008 in letters of credit by the FHLB which have been pledged to secure Local Agency Deposits. The letters of credit act as a guarantee of payment to certain third parties in accordance with specified terms and conditions. The letters of credit were not drawn upon in 2010 or 2009 and management does not expect to draw upon these lines in the future.

Junior Subordinated Deferrable Interest Debentures

We own the common securities of four business trusts that have issued an aggregate of $15.0 million in trust preferred securities fully and unconditionally guaranteed by us. The entire proceeds of each respective issuance of trust preferred securities were invested by the separate business trusts into junior subordinated deferrable interest debentures issued by us, with identical maturity, repricing and payment terms as the respective issuance of trust preferred securities. The aggregate amount of junior subordinated debentures issued by us is $15.5 million, with the maturity dates for the respective debentures ranging from 2033 through 2036. We may redeem the respective junior subordinated deferrable interest debentures earlier than the maturity date. At March 31, 2010, two of the debentures were redeemable, with the other two redeemable in October 2010 and July 2011.

Capital Resources

Shareholders’ equity at December 31, 2009 decreased to $9.5 million from $21.3 million at December 31, 2008 due to a net loss of $13.5 million for the year ended December 31, 2009 and was partially offset by the issuance of approximately $1.6 million in common stock from a private placement. A majority of the funds were raised from directors, officers and other charter members of the Board.

Shareholders’ equity at March 31, 2010 increased to $9.9 million from $9.5 million at December 31, 2009 due to net income of $337 thousand for the year three months ended March 31, 2010.

Under capital adequacy guidelines, the Company and the Bank must meet specific capital guidelines that involve quantitative measures of their assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. These quantitative measures are established by regulation and require that minimum amounts and ratios of total and Tier 1 capital to risk-weighted assets and of Tier 1 capital to average assets be maintained. Capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

The regulatory capital guidelines as well as the actual capital ratios for Citizens Bancorp and Citizens Bank as of December 31, 2009 are as follows:


	CITIZENS BANCORP AND SUBSIDIARIES		CITIZENS BANK

	Minimum Regulatory Requirement	Actual Capital Ratio	Minimum Regulatory Requirement	Minimum Regulatory Requirement for “Well Capitalized” Institution	Actual Capital Ratio

Leverage Ratio	4.0%	3.3%	4.0% (1)	5.0%	6.1%

Tier 1 Risk-Based Ratio	4.0%	4.1%	4.0%	6.0%	7.7%

Total Risk-Based Ratio	8.0%	9.2%	8.0%	10.0%	8.9%

(1) The Order entered into by the Bank in February 2010, requires the Bank to maintain a Tier 1 capital to average assets (Leverage) ratio equal to or greater than 9% by July 2010. We did not meet the deadline for increasing the capital ratio; however, we continue our efforts to raise the capital needed to meet the capital requirements in the agreement.

The regulatory capital guidelines as well as the actual capital ratios for the Company and the Bank as of March 31, 2010 are as follows:


	CITIZENS BANCORP AND SUBSIDIARIES		CITIZENS BANK

	Minimum Regulatory Requirement	Actual Capital Ratio	Minimum Regulatory Requirement	Minimum Regulatory Requirement for “Well Capitalized” Institution	Actual Capital Ratio

Leverage Ratio	4.0%	3.7%	4.0% (1)	5.0%	6.8%

Tier 1 Risk-Based Ratio	4.0%	4.4%	4.0%	6.0%	8.0%

Total Risk-Based Ratio	8.0%	9.5%	8.0%	10.0%	9.3%

Off-Balance Sheet Arrangements

Loan Commitments

In the normal course of business, there are various commitments outstanding to extend credit that are not reflected in the financial statements. Commitments to extend credit and letters of credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Annual review of commercial credit lines, letters of credit and ongoing monitoring of outstanding balances reduces the risk of loss associated with these commitments. As of December 31, 2009, the Company had $60.8 million in unfunded loan commitments and $1.1 million in letters of credit. This compares to $89.4 million in unfunded

commitments and $1.4 million in letters of credit at December 31, 2008. Of the $60.8 million in unfunded loan commitments, $22.0 million and $38.8 million represented commitments to commercial and consumer customers, respectively. Of the total unfunded commitments at December 31, 2009, $39.6 million were secured by real estate, of which $2.0 million was secured by commercial real estate and $37.6 million was secured by residential real estate in the form of equity lines of credit. The commercial loan commitments not secured by real estate primarily represent business lines of credit, while the consumer loan commitments not secured by real estate primarily represent revolving credit card lines. Since some of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

Guaranteed Credit Cards

The Company has guaranteed certain credit cards that were issued by other banks. The guaranteed credit cards are issued to customers of the Bank. The Company evaluates each customer’s creditworthiness on a case-by-case basis. As of December 31, 2009 and 2008, the guaranteed credit cards had total credit commitments of $1.3 million and $1.2 million, respectively. Losses on guaranteed credit cards were not material for the years ended December 31, 2009, 2008 and 2007.

Operating Leases

We lease all seven depository branches as well as our administration office under noncancelable operating leases. These leases expire on various dates through 2017 and have various renewal options ranging from three to ten years. Rental expense included in occupancy and equipment expense totaled $585,000, $574,000 and $552,000 for the years ended December 31, 2009, 2008 and 2007, respectively.

Liquidity Management

Management believes that the level of primary and secondary sources of liquidity is sufficient to meet our current and presently anticipated funding needs on a consolidated basis.

Citizens Bancorp

On a stand-alone basis, we rely on dividends from the Bank as our primary source of liquidity. As of December 31, 2009, the Bank could not provide for any dividend distributions to the Company. In order to preserve capital, in August 2009, we began deferring TARP dividend payments and in July 2010 we began deferring interest payments on trust preferred securities. To further augment capital, we successfully completed a private placement during December 2009, selling $1.6 million in common stock. In addition, in April 2010, as a continuation of the private placement, we received an additional $100,000 for the sale of common stock.

Citizens Bank

The Bank’s primary source of funds is deposits. On an ongoing basis, management anticipates funding needs for loans, asset purchases, maturing deposits, and other needs and initiates deposit promotions as needed. Management periodically measures the Bank’s liquidity position through the use of short-term and medium-term internal liquidity calculations. These are monitored on an ongoing basis by the Board of Directors and the Bank’s Asset Liability Management Committee.

Based upon our existing business plan, management believes that the level of liquid assets and secondary liquidity is sufficient to meet the Bank’s current and presently anticipated funding needs. The Bank’s liquidity ratio was 16.7% at December 31, 2009, 9.1% at December 31, 2008 and 4.0% at December 31, 2007. The Bank has a successful history of establishing and retaining deposit relationships with business customers and periodically utilizes collateralized borrowing lines and wholesale funding resources to supplement local deposit growth. These include borrowing lines with FHLB, FRB, and correspondent banks, and utilization of brokered time deposits. At December 31, 2009, the Bank had available credit of $24.4 million from the FHLB and $922,000 from FRB. At December 31, 2009, the Bank was not eligible to utilize brokered deposits.

Our liquidity may be impacted negatively, however, by several other factors, including worsening economic conditions and seasonal fluctuations of deposits.

Adoption of New Financial Accounting Standards

See Note 2 – “Summary of Significant Accounting Policies – Adoption of New Financial Accounting Standards” of the Company’s Consolidated Financial Statements in Item 8 – Financial Statements of this prospectus for information related to recent accounting pronouncements.

BUSINESS

Overview and History

Citizens Bancorp

We are the bank holding company for Citizens Bank of Northern California (also referred to as “Citizens Bank” or “Bank”), a California chartered bank. At this time, Citizens Bancorp functions primarily as the holder of all of Citizens Bank common stock. It may, in the future, acquire or form additional subsidiaries, including other banks to the extent permitted by law, although Citizens Bancorp has no plans to do so in the immediate future. Citizens Bancorp does not own or lease any property and has no paid employees; however, it shares the facilities and employees of Citizens Bank.

The Company formed Citizens Bancorp Trust I on June 18, 2003, Citizens Bancorp Trust II on July 7, 2004, Citizens Bancorp Trust III on August 24, 2005 and Citizens Bancorp Trust IV on June 28, 2006 as Delaware business trusts for the sole purpose of issuing trust preferred securities.

As a bank holding company, the Company is regulated by the Federal Reserve Board. The Bank is a California state chartered bank, regulated by the DFI and its primary federal regulator is the FDIC.

Citizens Bank

Citizens Bank is an FDIC-insured commercial bank chartered as a financial institution by the State of California. Formed in 1994 and headquartered in Nevada City, California, Citizens Bank has six branches in communities throughout Nevada County, including Nevada City, Penn Valley, Lake of the Pines, Truckee, and two branches in Grass Valley. In addition the Bank has one branch in Placer County in the city of Auburn.

Citizens Bank provides community banking services in its market areas offering a wide variety of deposit products, commercial, residential and consumer loans and other traditional banking products and services, including electronic banking services, that are designed to meet the needs of small and middle market businesses and individuals. As a full service community bank, Citizens Bank seeks to differentiate itself from its competitors through superior personal service, responsiveness and local decision-making.

Our Business

We focus on meeting the commercial banking needs in Nevada County and in the greater Auburn area in Placer County. Our customers are generally small- to medium-sized businesses (generally representing businesses with less than $25 million in annual revenues) that require highly personalized commercial banking products and services that we deliver in our relationship banking style. We believe that our customers prefer locally owned and managed banking institutions that provide responsive, personalized service and customized products. In 2009, for the 11th year in a row, the quality of our service was voted “Best in Nevada County” by the readers of The Union newspaper. A substantial portion of our business is with customers who have long-standing relationships with our officers or directors or who have been referred to us by existing customers.

We have focused our lending activities on real estate secured transactions. Commercial real estate loans, construction loans and land acquisition and development loans, comprised 61% of our loan portfolio at December 31, 2009 compared to 67% at December 31, 2008. We also see opportunity in growing our residential real estate loans, which comprised 23% of our loan portfolio at December 31, 2009 compared to 15% at December 31, 2008. Non-real estate

commercial and other loans comprised 16% of our loan portfolio at December 31, 2009 compared to 18% at December 31, 2008. On the deposit side, we have focused on continuing to increase our already strong demand deposit base, which is generally obtained from strong commercial banking relationships. Non-interest bearing demand deposits were 25% of our total deposits at December 31, 2009 compared to 22% at December 31, 2008.

We have seven full service branches, two located in Grass Valley and one each in Nevada City, Penn Valley, Lake of the Pines, Truckee and Auburn. Our headquarters is located at our Nevada City branch at 305 Railroad Avenue, Nevada City, California 95959 and our telephone number is (530) 478-6000. We maintain a website at www.citizensbanknc.com.

Events of 2008 and 2009

In 2008 and 2009, we suffered losses of $10.7 million and $13.5 million, respectively. These losses were primarily the result of:


•	a major economic recession in our market area, California and the nation which resulted in decreasing real estate values and significant unemployment;

•	a concentration in land and construction loans;

•	a circumvention of certain policies and procedures within the loan administration function; and

•	the need for a valuation reserve on our deferred tax assets.

The confluence of these circumstances led us to a restatement of our 2008 financial statements after an examination by the DFI in May of 2009 and a significant change in our senior management team. In 2009, because of the accumulative deficit position of the Company, a valuation allowance of $9.3 million was recorded against all of the Company’s net deferred tax assets.

Management Responses


•	completing a comprehensive review of the loan portfolio;

•	reorganizing the credit administration and underwriting functions, including internal control enhancement;

•	hiring a number of new senior officers;

•	increasing equity capital by almost $1.7 million through the private placement of Company stock;


•	planning a reduction in assets of approximately $50 million in 2010 in order to support regulatory capital ratios;

•	assigning Mr. Campbell as Chief Risk Officer and Mr. Behn as Senior Credit Administrator;

•	maintaining a net interest margin within the 90^th percentile of all insured commercial banks with assets between $300 million and $1.0 billion;

•	changing our funding mix by reducing brokered deposits and focusing on building core deposits;

•	becoming more efficient by centralizing operations and reducing non-interest expense;

•	initiating an SBA department to diversify the loan portfolio, reduce risk and generate fee income; and

Major Challenges

Despite the foregoing efforts and accomplishments, the board of directors and management are faced with several major challenges in the short run in attempting to overcome the events of 2008, 2009 and 2010. These major challenges include:

Recapitalization

Our capital has been significantly reduced as a result of the losses in 2008, 2009 and the first six months of 2010 and we must now recapitalize the Company and the Bank. We were required by our regulators to raise the Bank’s leverage capital ratio to 9% by the middle of July. Although we have not met the deadline, we are continuing our efforts to raise the capital needed to reach the capital ratios required in the Order. See “Consent Order and Written Agreement.” To achieve such a ratio by that date, we must:


•	increase the Bank’s capital through a combination of new equity capital and its earnings;

•	continue to reduce assets from the amount at year end 2009; and

•	minimize future losses from the $29.9 million in non-performing loan we had at June 30, 2009 or from other assets.

If we do not achieve all these goals, we will not be able to satisfy the capital requirement of the Order which would have a material adverse effect on the Company and the Bank and the value of your investment and our ability to continue as a going concern. See “Supervision and

Regulation – Capital Standards” and “Supervision and Regulation-Prompt Corrective Action and Other Enforcement Mechanisms.”

Consent Order and Written Agreement

The Order requires the Bank to:


•	take various steps to ensure that competent management is in place;

•	within 150 days of the effective date of the Order and thereafter, achieve and maintain tangible shareholder’s equity to total tangible assets, and Tier 1 capital to total assets, equal to or greater than 9%;

•	develop, adopt and implement a Capital Plan setting forth specific actions that the Bank will take to satisfy the Capital Requirement;

•	take various steps to improve Bank’s asset quality including reducing classified assets to certain levels within given time-frames, providing for an adequate provision for loan losses on a quarterly basis and adopting changes to lending policies and procedures;

•	formulate and implement a written plan and a comprehensive budget for all categories of income and expense to improve and sustain Bank’s earnings;

•	not establish any new branches or other offices except with the prior written approval of the FDIC and DFI during the life of the Order;

•	adopt and implement a written contingency liquidity policy which sets forth alternate courses of action to be taken in response to possible adverse liquidity events;

•	not make any distribution of dividends to the Bank’s shareholder except with the prior written approval of the FDIC and DFI during the life of the Order;

•	comply with the applicable FDIC rules and regulations regarding brokered deposits during the life of the Order;

•	take various steps to ensure compliance with Consumer Laws; and


•	furnish written progress reports to the authorities at FDIC and DFI to detail the form and manner of any actions taken to ensure compliance with the Order.

In the Federal Reserve Agreement, the Company agreed that:


•	the Board of Directors of the Company shall take appropriate steps to fully utilize the Company’s financial and managerial resources, and to ensure that the Bank complies with the Order entered into with the FDIC and the DFI and any other supervisory action taken by the Bank’s federal or state regulators;

•	the Company shall not declare or pay any dividends nor make any distribution of interest, principal, or other sums on subordinated debentures or trust preferred securities without the prior written approval of the Federal Reserve Board;

•	the Company and its nonbank subsidiaries, if any, shall not, directly or indirectly incur, increase or guarantee any debt, nor shall the Company directly or indirectly, purchase or redeem any shares of its stock without the prior approval of the Federal Reserve Board;

•	the Company shall comply with certain notice provisions under the applicable federal rules and regulations to notify the Federal Reserve Board in appointing any new director or senior executive officer, or changing the responsibilities of any senior executive officer so that the officer would assume a different senior executive officer position;

•	the Company shall comply with restrictions on indemnification and severance payments pursuant to the applicable federal laws and regulations; and

•	within 30 days after the end of each calendar quarter following the date of the Federal Reserve Agreement, the Board of Directors shall submit to the Federal Reserve Board written progress reports detailing the form and manner of all actions taken to secure compliance with the provisions of the Agreement and the result thereof, applicable financial data of the Company, and changes in shareholders’ equity.

Strengthen the Balance Sheet

Non-performing assets, which include non-accrual loans, loans past due 90 days and still accruing, and other real estate owned totaled $39.4 million as of June 30, 2010. Reducing the level of non-performing assets will take a significant effort and will likely continue through 2011 and perhaps longer. We have dedicated additional resources and will continue our proactive approach to managing our non-performing assets with aggressive loan resolution strategies and loan sales, as appropriate. We expect that many of these assets will eventually require foreclosure and subsequent sale by the Bank. This will prove to be a detriment to our earnings since we will not be earning any interest on the non-performing asset, will also have the cost of carrying the property while awaiting sale, and may experience further losses if the value of such property declines, as discussed below.

Return to Profitability


	•	a strong net interest margin of 4.51% at December 31, 2009 driven by our low cost of funds;

	•	approximately $9.3 million in deferred tax assets to shelter future income from taxes, subject to certain limitations;

	•	the opening of our SBA department to generate small business government guaranteed loans which can be retained for earnings or sold in the secondary market for a premium with the possibility of service fee income; and

	•	an increase in operating efficiencies and cost reduction measures which should favorably impact non-interest expense.

Our Business Strategy

Our long-term business strategy is to provide comprehensive banking and related services to small- to medium-sized businesses and their employees. The key elements of our strategy are:


	•	Maintain our emphasis on business banking

		Our focus on providing comprehensive banking services to small- to medium-sized businesses continues to help us grow our core non-interest bearing deposit base and maintain our strong net interest margin.

	•	Increase market share

		Because Citizens Bank is the only community bank headquartered in Nevada County, we believe that there is significant potential to increase business with current customers, to attract new customers in our existing markets, and to position ourselves to enter new markets. Quality service, which is an integral part of our culture, and doing business locally, are reasons that the Bank’s customers prefer our locally-based organization.

	•	Use technology to expand our customer base

		While our strategy continues to emphasize superior personal service, we also take advantage of user-friendly technology-based systems to attract customers who may prefer to interact with their financial institution electronically. We offer technology-based services including voice response banking, debit cards, online banking, bill pay and cash management, remote deposit capture, ATMs and an internet website. We believe the availability of both traditional banking services and electronic banking services enhance our ability to attract a broader range of customers.

	•	Maintain and recruit highly competent personnel

		We have developed a strong corporate culture that has allowed us to recruit and retain some of the best bankers in the Northern California market. We are committed to attracting, developing and retaining people who are significantly knowledgeable about the banking industry and passionate about the communities which we serve. Our compensation and benefits program is competitive. The individuals who comprise our executive management team have an average of thirty-four years of banking industry experience, and our business development and service personnel are well-respected, as well as, very involved in our communities.

Our Competition

Citizens Bank faces competition both in making loans and generating deposits. In the past, Citizens Bank’s most direct competition has come from larger regional banks. These regional banks are well-established and have substantially greater financial resources than Citizens Bank, which have enabled them to market their products and services extensively, offer access to a greater number of locations and products, and price competitively. In addition,

Citizens Bank faces competition for loans from out-of-state financial institutions which have established loan production offices as well as from non-bank competitors. Competition for deposits also comes from short-term money market funds, other corporation and government securities funds and other non-bank financial institutions such as brokerage firms and insurance companies. Many of Citizens Bank’s non-bank competitors are not subject to the same degree of regulation as that imposed on federally insured state chartered banks. As a result, such non-bank competitors have advantages over Citizens Bank in providing certain services.

The California Department of Finance estimates a Nevada County population decrease of 0.2% from January 2008 to January 2009, compared to a growth rate of 1.1% for the State of California. In addition, according to the report, the city of Auburn in Placer County, population increased an estimated 0.9% for the same period. Accordingly, Citizens Bank’s future growth depends largely upon its ability to increase its market penetration. Based on deposit information gathered annually and available to the banking industry in October each year, deposits in all 47 of the banks in Citizens Bank’s service area were $2.9 billion, down $30 million, or 1% from June 30, 2008 to June 30, 2009. Citizens Bank had 10.70% market share at June 30, 2009, compared to 8.47% at June 30, 2008, the 4th largest market share. The top five financial institutions included three banks and two thrifts. Of the top five financial institutions, those with at least 8% market share, only two other institutions registered an increase in market share over the previous year.

The banking and financial services business in California in general and Nevada County and the greater Auburn area in Placer County in particular is highly competitive. This increasingly competitive environment is a result primarily of growth in community banks, changes in regulation, changes in technology and product delivery systems, and the accelerating pace of consolidation among financial services providers. We compete for loans, deposits and customers with other commercial banks, savings and loan associations, securities and brokerage companies, mortgage companies, insurance companies, finance companies, money market funds, credit unions, and other nonbank financial service providers. Many of these competitors are much larger in total assets and capitalization, have greater access to capital markets and offer a broader range of financial services than we can offer.

Competition for deposit and loan products remains strong from both banking and non-banking firms and this competition directly affects the rates of those products and the terms on which they are offered to consumers.

Technological innovation continues to contribute to greater competition in domestic and international financial services markets. Many customers now expect a choice of several delivery systems and channels, including telephone, mail, home computer and ATMs.

Mergers between financial institutions have placed additional pressure on banks to consolidate their operations, reduce expenses and increase revenues to remain competitive. In addition, competition has intensified due to federal and state interstate banking laws, which permit banking organizations to expand geographically with fewer restrictions than in the past. These laws allow banks to merge with other banks across state lines, thereby enabling banks to establish or expand banking operations in our market. The competitive environment is also

significantly impacted by federal and state legislation that make it easier for non-bank financial institutions to compete with us.

In marketing our services, we capitalize on our local identity and that of our directors, officers and shareholders who have business and personal ties to the local community. Since we are locally owned and operated, with a management team and Board of Directors charged with monitoring the financial needs of the local community, we expect to be in a position to respond promptly to the changing needs of our local customers.

We compete with other financial institutions in our service area by means of localized promotional activity, personalized service, and personal contact with potential customers by our executive officers, directors, employees and shareholders. Promotional activities include direct mail, media advertising, conducting financial seminars, community advisory groups and the participation by our executive officers in community business and civic groups. Our executive officers and directors are active members in the communities comprising our service area and they personally call on their business contacts and acquaintances to become our customers. In 2009, for the 11^th year in a row, the quality of our service was voted “Best in Nevada County” by the readers of the Union Newspaper.

Legal Proceedings

There are no major pending legal proceedings to which we or Citizens Bank is a party or to which any of our properties are subject. We are involved in a variety of litigation matters in the ordinary course of our business and anticipate that we will become involved in new litigation matters from time to time in the future.

Properties

We lease all seven of our current branch locations and our operational center as follows:


	•	The Nevada City Branch is located at 305 Railroad Avenue, Suite 1, Nevada City, California, and is approximately 2,950 square feet, with a lease term that began October 1, 1994, and will expire on October 30, 2017, at a rate of $1.34 per square foot. There are two five-year options to extend the term of this lease remaining.

	•	The Grass Valley Branch is located at 305 Neal Street, Grass Valley, California, and is approximately 5,540 square feet, with a lease term that began August 1, 2002, and will expire July 31, 2012, at a current rate of $1.14 per square foot that escalates annually by the increase in the CPI. We have 2 five-year options to extend the term of this lease remaining.

	•	The Penn Valley Branch is located at 11362 Pleasant Valley Road, Penn Valley, California, and is approximately 1,368 square feet, with a lease term that began December 1, 1997, and terminates September 30, 2014, at a rate of $1.08 per square foot. There are no options to extend the term of this lease remaining.


	•	The Olympia Park Branch is located at 709 Sutton Way, Grass Valley, California, and is approximately 5,374 square feet, with a lease term that began April 21, 2000, and terminates November 27, 2010, at a current rate of $1.23. There are no options to extend the term of this lease.

	•	The Lake of the Pines Branch is located at 10037 Combie Road, Auburn, California, and is approximately 2,162 square feet, with a lease term that began April 30, 2004, and terminates April 29, 2014, at a current rate of $2.61 per square foot that escalates annually by the increase in the CPI to a maximum of 5%. We have 2 five-year options to extend the term of this lease.

	•	The Truckee Branch is located at 12047 Donner Pass Road, Truckee, California and is approximately 3,000 square feet, with a lease term that began February 1, 2006, and terminates April 30, 2011, at a rate of $2.75 per square foot. We have 2 five-year options to extend the term of this lease.

	•	The Auburn Branch is located at 905 Lincoln Way, Auburn, California and is approximately 3,816 square feet, with a lease term that began May 1, 2006, and terminates April 30, 2011, at a current rate of $2.53 per square foot that escalates by 4% annually. We have 2 five-year options to extend the term of this lease.

	•	Our Operations Center is located at 208 Providence Mine Road, Suites 219 and 122, Nevada City, California, and is approximately 7,568 square feet, with a lease term that began September 1, 2005, and terminates August 31, 2010, at a current rate of $1.39 per square foot which escalates annually by the increase in the CPI to a maximum of 5%. We have 3 options to extend the term of this lease, each for 3 years.

Employees

We had a total of 81 full-time and 5 part-time employees at December 31, 2009. Our management believes that its employee relations are satisfactory. Citizens Bank maintains a benefit program which includes health and dental insurance, life and long-term disability insurance and a Profit Sharing 401(k) plan.

SUPERVISION AND REGULATION

The Company and the Bank are extensively regulated under both federal and state law. Set forth below is a summary description of certain laws that relate to the Company’s and the Bank’s regulation. The description does not purport to be complete and is qualified in its entirety by reference to the applicable laws and regulations.

The Company

The Company is a bank holding company within the meaning of the Bank Holding Company Act of 1956, as amended (the “Bank Holding Company Act”), and is registered as such with, and subject to the supervision of, the Federal Reserve Board. The Company is required to file with the Federal Reserve Board quarterly and annual reports and such additional information as the Federal Reserve Board may require pursuant to the Bank Holding Company Act. The Federal Reserve Board may conduct examinations of bank holding companies and their subsidiaries.

The Company is required to obtain the approval of the Federal Reserve Board before it may acquire all or substantially all of the assets of any bank, or ownership or control of the voting shares of any bank if, after giving effect to such acquisition of shares, the Company would own or control more than 5% of the voting shares of such bank. Prior approval of the Federal Reserve Board is also required for the merger or consolidation of the Company and another bank holding company.

The Company is prohibited by the Bank Holding Company Act, except in certain statutorily prescribed instances, from acquiring direct or indirect ownership or control of more than 5% of the outstanding voting shares of any company that is not a bank or bank holding company and from engaging, directly or indirectly, in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiaries. However, the Company may, subject to the prior approval of the Federal Reserve Board, engage in any, or acquire shares of companies engaged in, activities that are deemed by the Federal Reserve Board to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

The Federal Reserve Board may require that the Company terminate an activity or terminate control of or liquidate or divest subsidiaries or affiliates when the Federal Reserve Board determines that the activity or the control or the subsidiary or affiliates constitutes a significant risk to the financial safety, soundness or stability of any of its banking subsidiaries. The Federal Reserve Board also has the authority to regulate provisions of certain bank holding company debt. Under certain circumstances, the Company must file written notice and obtain approval from the Federal Reserve Board prior to purchasing or redeeming its equity securities.

Under the Federal Reserve Board’s regulations, a bank holding company is required to serve as a source of financial and managerial strength to its subsidiary banks and may not conduct its operations in an unsafe and unsound manner. In addition, it is the Federal Reserve Board’s policy that in serving as a source of strength to its subsidiary banks, a bank holding company should stand ready to use available resources to provide adequate capital funds to its subsidiary banks during periods of financial stress or adversity and should maintain the financial flexibility and capital-raising capacity to obtain additional resources for assisting its subsidiary banks. A bank holding company’s failure to meet its obligations to serve as a source of strength to its subsidiary banks will generally be considered by the Federal Reserve Board to be an unsafe and unsound banking practice or a violation of the Federal Reserve Board’s regulations or both.

The Company and the Bank are prohibited from engaging in certain tie-in arrangements in connection with any extension of credit, sale or lease of property or furnishing of services. For example, with certain exceptions, neither the Company nor the Bank may condition an extension of credit to a customer on either (1) a requirement that the customer obtain additional services provided by us or (2) an agreement by the customer to refrain from obtaining other services from a competitor.

The Bank

The Bank is chartered under the laws of the State of California and its deposits are insured by the FDIC to the extent provided by law. The Bank is subject to the supervision of, and is regularly examined by, the DFI and the FDIC. Such supervision and regulation include comprehensive reviews of all major aspects of the Bank’s business and condition. Federal and California statutes relate to many aspects of the Bank’s operations, including:


	•	reserves against deposits;

	•	interest rates payable on deposits;

	•	loans and investments;

	•	mergers and acquisitions;

	•	borrowings;

	•	dividends;

	•	locations of branch offices; and

	•	level of capital.

If, as a result of an examination of a bank, the FDIC or the DFI should determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, or other aspects of a bank’s operations are unsatisfactory or that a bank or its management is violating or has violated any law or regulation, various remedies are available to these regulatory agencies. Such remedies include the power:


	•	to enjoin “unsafe or unsound” practices;

	•	to require affirmative action to correct any conditions resulting from any violation or practice;

	•	to issue an administrative order that can be judicially enforced, to direct an increase in capital;

	•	to restrict the growth of the bank;


	•	to assess civil monetary penalties;

	•	to remove officers and directors; and

	•	to ultimately terminate the bank’s deposit insurance, which for a California chartered bank would result in a revocation of the bank’s charter. See “Consent Order and Written Agreement.”

Capital Standards

The Federal Reserve Board and the FDIC have adopted risk-based minimum capital guidelines intended to provide a measure of capital that reflects the degree of risk associated with a banking organization’s operations for both transactions reported on the balance sheet as assets and transactions, such as letters of credit and recourse arrangements, which are recorded as off balance sheet items. Under these guidelines, nominal dollar amounts of assets and credit equivalent amounts of off balance sheet items are multiplied by one of several risk adjustment percentages, which range from 0% for assets with low credit risk, such as certain U.S. Treasury securities, to 100% for assets with relatively high credit risk, such as business loans.

A banking organization’s risk-based capital ratios are obtained by dividing its qualifying capital by its total risk adjusted assets. The regulators measure risk-adjusted assets, which includes off balance sheet items, against both total qualifying capital (the sum of Tier 1 capital and limited amounts of Tier 2 capital) and Tier 1 capital. Tier 1 capital consists primarily of common stock, retained earnings, non-cumulative perpetual preferred stock and minority interests in certain subsidiaries, less most intangible assets. Tier 2 capital may consist of a limited amount of the allowance for possible loan and lease losses, cumulative preferred stock, long-term preferred stock, eligible term subordinated debt and certain other instruments with some characteristics of equity. The inclusion of elements of Tier 2 capital is subject to certain other requirements and limitations of the federal banking agencies. The federal banking agencies require a minimum ratio of qualifying total capital to risk-adjusted assets of 8% and a minimum ratio of Tier 1 capital to risk-adjusted assets of 4%.

In addition to the risked-based guidelines, federal banking regulators require banking organizations to maintain a minimum amount of Tier 1 capital to quarterly average total assets, referred to as the leverage ratio. For a banking organization rated in the highest of the five categories used by regulators to rate banking organizations, the minimum leverage ratio of Tier 1 capital to total assets is 3%. For all banking organizations not rated in the highest category, the minimum leverage ratio must be at least 4%.

In addition to these uniform risk-based capital guidelines and leverage ratios that apply across the industry, the regulators have the discretion to set individual minimum capital requirements for specific institutions at rates significantly above the minimum guidelines and ratios. Future changes in regulations or practices could further reduce the amount of capital recognized for purposes of capital adequacy. Such a change could affect the Company’s ability to grow and could restrict the amount of profits, if any, available for the payment of dividends.

Pursuant to the Order with the DFI and FDIC, the Bank is required to reach and maintain tangible shareholder’s equity to total tangible assets and Tier 1 capital to total assets, equal or greater than 9%. See “Summary-Recent Developments-Regulatory Orders.”

The Commissioner of the DFI (the “Commissioner”) also has authority to take possession of the business and properties of a bank in the event that the tangible shareholders’ equity of the bank is less than the greater of (i) 3% of the bank’s total assets or (ii) $1,000,000.

For information concerning the Company’s capital ratios, see, “Capitalization” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

Under applicable regulatory guidelines, the Bank was considered “Adequately Capitalized” as of December 31, 2009 and June 30, 2010.

Prompt Corrective Action and Other Enforcement Mechanisms

Federal banking agencies possess broad powers to take corrective and other supervisory action to resolve the problems of insured depository institutions, including but not limited to those institutions that fall below one or more prescribed minimum capital ratios described above. An institution that, based upon its capital levels, is classified as well capitalized, adequately capitalized, or undercapitalized may be treated as though it were in the next lower capital category if the appropriate federal banking agency, after notice and opportunity for hearing, determines that an unsafe or unsound condition or an unsafe or unsound practice warrants such treatment. At each successive lower capital category, an insured depository institution is subject to more restrictions. The federal banking agencies, however, may not treat a significantly undercapitalized institution as critically undercapitalized unless its capital ratio actually warrants such treatment.

In addition to measures taken under the prompt corrective action provisions, commercial banking organizations may be subject to potential enforcement actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation, or any condition imposed in writing by the agency or any written agreement with the agency. Enforcement actions may include:


	•	the imposition of a conservator or receiver;

	•	the issuance of a cease-and-desist order that can be judicially enforced;

	•	the termination of insurance of deposits (in the case of a depository institution);

	•	the imposition of civil money penalties;

	•	the issuance of directives to increase capital;


	•	the issuance of formal and informal agreements;

	•	the issuance of removal and prohibition orders against institution-affiliated parties; and

	•	the enforcement of such actions through injunctions or restraining orders based upon a judicial determination that the agency would be harmed if such equitable relief was not granted.

Safety and Soundness Standards

The Federal Deposit Insurance Corporation Improvement Act (“FDICIA”) imposes certain specific restrictions on transactions and requires federal banking regulators to adopt overall safety and soundness standards for depository institutions related to internal control, loan underwriting and documentation and asset growth. Among other things, FDICIA limits the interest rates paid on deposits by undercapitalized institutions, restricts the use of brokered deposits, limits the aggregate extensions of credit by a depository institution to an executive officer, director, principal shareholder or related interest, and reduces deposit insurance coverage for deposits offered by undercapitalized institutions for deposits by certain employee benefits accounts. The federal banking agencies have the flexibility to pursue appropriate or effective courses of action given the specific circumstances and severity of an institution’s noncompliance with one or more standards, including requiring an institution to submit an acceptable compliance plan.

Premiums for Deposit Insurance

Due to the recent passage of the Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), the Bank’s deposits are insured to a maximum of $250,000 per depositor through the Bank’s Insurance Fund administered by the FDIC. Additionally, the FDIC will insure the full amount of qualifying “noninterest-bearing transaction accounts” for 2 years beginning December 31, 2010. The Bank is required to pay deposit insurance premiums, which are assessed semiannually and paid quarterly. The premium amount is based upon a risk classification system established by the FDIC. Banks with higher levels of capital and a low degree of supervisory concern are assessed lower premiums than banks with lower levels of capital or a higher degree of supervisory concern.

The FDIC is also empowered to make special assessments on insured depository institutions in amounts determined by the FDIC to be necessary to give it adequate assessment income to repay amounts borrowed from the U.S. Treasury and other sources or for any other purpose the FDIC deems necessary.

The FDIC is authorized to terminate a depository institution’s deposit insurance upon a finding by the FDIC that the institution’s financial condition is unsafe or unsound or that the institution has engaged in unsafe or unsound practices or has violated any applicable rule, regulation, order or condition enacted or imposed by the institution’s regulatory agency.

Lending Limits

Under California law the amount of funds that the Bank can lend to any one borrower or group of related borrowers is restricted. In general, any one person’s (i) unsecured obligations cannot exceed 15% of the sum of such bank’s shareholders’ equity, allowance for loan losses and capital notes/debentures and (ii) unsecured and secured obligations in the aggregate cannot exceed 25% of the sum of such bank’s shareholders’ equity, allowance for loan losses and capital notes/debentures. The Bank’s lending limit for unsecured loans at June 30, 2010 was approximately $5.3 million and its secured lending limit was approximately $8.9 million.

Payment of Dividends

The Company is a legal entity separate and distinct from the Bank. The Company’s shareholders are entitled to receive dividends when declared by its Board of Directors, out of funds legally available therefore, subject to the restrictions set forth in California corporate law. California corporate law provides that a corporation may make a distribution to its shareholders if the corporation’s retained earnings equal at least the amount of the proposed distribution. It also provides that, in the event that sufficient retained earnings are not available for the proposed distribution, a corporation may, nevertheless, make a distribution to its shareholders if it meets two conditions, which generally stated are as follows: (i) the corporation’s assets equal at least 1-1/4 times its liabilities, and (ii) the corporation’s current assets equal at least its current liabilities or, if the average of the corporation’s earnings before taxes on income and before interest expenses for the two preceding fiscal years was less than the average of the corporation’s interest expenses for such fiscal years, then the corporation’s current assets must equal at least 1-1/4 times its current liabilities.

The ability of the Company to pay a cash dividend depends largely on the Bank’s ability to pay a cash dividend to the Company. The payment of cash dividends by the Bank is subject to restrictions set forth in the California Financial Code. Such Code provides that a bank may not make a cash distribution to its shareholders in excess of the lesser of (a) the Bank’s retained earnings; or (b) the Bank’s net income for its last three fiscal years, less the amount of any distributions made by the Bank or by any majority-owned subsidiary of the Bank to the shareholders of the Bank during such period. However, a bank may, with the approval of the Commissioner, make a distribution to its shareholders in an amount not exceeding the greater of (x) its retained earnings; (y) its net income for its last fiscal year; or (z) its net income for its current fiscal year. In the event that the Commissioner determines that the shareholders’ equity of a bank is inadequate or that the making of a distribution by the Bank would be unsafe or unsound, he may order the Bank to refrain from making a proposed distribution. The FDIC may also restrict the payment of dividends if such payment would be deemed unsafe or unsound or if after the payment of such dividends, the Bank would be included in one of the “undercapitalized” categories for capital adequacy purposes pursuant to federal law.

Under California law, neither the Company nor the Bank is currently eligible to pay dividends. The Company is also in arrears on the payment of dividends on its classes of preferred stock held by the U.S. Treasury pursuant to the CCP. In addition, it is anticipated that

the Company will begin deferring interest payments with respect to its trust preferred securities. While such arrearage and deferral are in effect, the Company is ineligible to pay dividends on its common stock even if it were otherwise eligible to pay the dividend under California law.

Community Reinvestment Act

The Bank is subject to certain fair lending requirements and reporting obligations involving home mortgage lending operations and Community Reinvestment Act (“CRA”) activities. The CRA generally requires the federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of their local communities, including low and moderate income neighborhoods. In addition to substantial penalties and corrective measures that may be required for a violation of certain fair lending laws, the federal banking agencies may take compliance with such laws and CRA into account when regulating and supervising other activities.

When a bank applies for approval to open a branch office, the FDIC will review the assessment of each such bank, and such records may be the basis for denying the application. When a bank holding company applies for approval to acquire a bank or other bank holding company, the Federal Reserve Board will review the assessment of each subsidiary bank of the applicant bank holding company, and such records may be the basis for denying the application. A bank’s compliance with its CRA obligations is based on a performance-based evaluation system which bases CRA ratings on an institution’s lending service and investment performance, resulting in a rating by the appropriate bank regulatory agency of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.” At its last examination by the FDIC, the Bank received a CRA rating of “satisfactory.”

Transactions between Affiliates

Transactions between a bank and its “affiliates” are quantitatively and qualitatively restricted under the Federal Reserve Act. The Federal Reserve Board issued Regulation W on October 31, 2002, which comprehensively implements Sections 23A and 23B of the Federal Reserve Act. Sections 23A and 23B and Regulation W restrict loans by a depository institution to its affiliates, asset purchases by a depository institution from its affiliates, and other transactions between a depository institution and its affiliates. Regulation W unifies in one public document the Federal Reserve Board’s interpretations of Section 23A and 23B. Regulation W had an effective date of April 1, 2003.

Privacy

Federal banking rules limit the ability of banks and other financial institutions to disclose non-public information about consumers to nonaffiliated third parties. Pursuant to these rules, financial institutions must provide:


	•	initial notices to customers about their privacy policies, describing the conditions under which they may disclose non-public information to nonaffiliated third parties and affiliates;


	•	annual notices of their privacy policies to current customers; and

	•	a reasonable method for customers to “opt out” of disclosures to nonaffiliated third parties.

These privacy provisions affect how consumer information is transmitted through diversified financial companies and conveyed to outside vendors. We have implemented our privacy policies in accordance with the law.

In recent years, a number of states have implemented their own versions of privacy laws. For example, in 2003, California adopted standards that are more restrictive than federal law, allowing bank customers the opportunity to bar financial companies from sharing information with their affiliates.

Recent Legislation

Financial Services Modernization Legislation

On November 12, 1999, the Gramm-Leach-Bliley Act of 1999 (the “Financial Services Modernization Act”) was signed into law. The Financial Services Modernization Act is intended to modernize the banking industry by removing barriers to affiliation among banks, insurance companies, the securities industry and other financial service providers. It provides financial organizations with the flexibility of structuring such affiliations through a holding company structure or through a financial subsidiary of a bank, subject to certain limitations. The Financial Services Modernization Act establishes a new type of bank holding company, known as a financial holding company, which may engage in an expanded list of activities that are “financial in nature,” which include securities and insurance brokerage, securities underwriting, insurance underwriting and merchant banking. We have not sought “financial holding company” status and have no present plans to do so.

The Financial Services Modernization Act also sets forth a system of functional regulation that makes the Federal Reserve Board the “umbrella supervisor” for holding companies, while providing for the supervision of the holding company’s subsidiaries by other federal and state agencies.

In addition, the Bank is subject to other provisions of the Financial Services Modernization Act, including those relating to CRA, privacy and safe-guarding confidential customer information, regardless of whether the Company elects to become a financial holding company or to conduct activities through a financial subsidiary of the Bank. The Company does not, however, currently intend to file notice with the Federal Reserve Board to become a financial holding company or to engage in expanded financial activities through a financial subsidiary of the Bank.

The Company and the Bank do not believe that the Financial Services Modernization Act will have a material adverse effect on their operations in the near-term. However, to the extent that it permits banks, securities firms, and insurance companies to affiliate, the financial services

industry may experience further consolidation. The Financial Services Modernization Act is intended to grant to community banks certain powers as a matter of right that larger institutions have accumulated on an ad hoc basis. Nevertheless, this act may have the result of increasing the amount of competition that the Company faces from larger institutions and other types of companies Offering financial products, many of which may have substantially more financial resources than the Company.

USA Patriot Act of 2001

On October 26, 2001, President Bush signed the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism, or the Patriot Act, of 2001. Among other things, the Patriot Act (i) prohibits banks from providing correspondent accounts directly to foreign shell banks; (ii) imposes due diligence requirements on banks opening or holding accounts for foreign financial institutions or wealthy foreign individuals (iii) requires financial institutions to establish an anti-money-laundering compliance program, and (iv) eliminates civil liability for persons who file suspicious activity reports. The Patriot Act also increases governmental powers to investigate terrorism, including expanded government access to account records. The Department of the Treasury is empowered to administer and make rules to implement the Patriot Act. While we believe the Patriot Act may, to some degree, affect the Company’s recordkeeping and reporting expenses, we do not believe that it will have a material adverse effect on our business and operations.

Sarbanes-Oxley Act

In July 2002, President Bush signed into law the Sarbanes-Oxley Act of 2002 (“SOA”) implementing legislative reforms intended to address corporate and accounting improprieties. The SOA generally applies to all companies, both U.S. and non-U.S., that file or are required to file periodic reports with the Securities and Exchange Commission (“SEC”) under the Exchange Act. The SOA includes very specific additional disclosure requirements and new corporate governance rules, requires the SEC and securities exchanges to adopt extensive additional disclosure, corporate governance and other related rules and mandates further studies of certain issues. The SOA represents significant federal involvement in matters traditionally left to state regulatory systems, such as the regulation of the accounting profession, and to state corporate law, such as the relationship between a Board of Directors and management and between a Board of Directors and its committees.

Emergency Economic Stabilization Act

In response to the financial crisis affecting the banking system and financial markets, the EESA was signed into law on October 3, 2008, and established TARP. As part of TARP, the Treasury) established the CPP to provide up to $700 billion of funding to eligible financial institutions through the purchase of capital stock and other financial instruments for the purpose of stabilizing and providing liquidity to the U.S. financial markets. In connection with EESA, there have been numerous actions by the FRB, Congress, and the Treasury, the FDIC, the SEC and others to further the economic and banking industry stabilization efforts under EESA. It

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remains unclear at this time what further legislative and regulatory measures will be implemented under EESA affecting the Company.

Financial Stability Plan

On February 10, 2009, Treasury announced the Financial Stability Plan (“FSP”) which, among other things, established a new Capital Assistance Program (“CAP”) through which eligible banking institutions will have access to Treasury capital as a bridge to private capital until market conditions normalize, and extended the Debt Guarantee Program of the FDIC’s Temporary Liquidity Guarantee Program (“TLGP”) to October 31, 2009 pursuant to which the FDIC fully guaranteed certain newly issued senior unsecured debt and provided full FDIC deposit insurance coverage for certain accounts, including noninterest bearing transaction deposit accounts. The Transaction Account Guarantee Program of the TLGP was extended until December 31, 2010. As a complement to CAP, a new Public-Private Investment Fund on an initial scale of up to $500 billion, which was later revised to be $30 billion, was announced to catalyze the removal of legacy assets from the balance sheets of financial institutions. This fund will combine public and private capital with government financing to help free up capital to support new lending. In addition, the existing Term Asset-Backed Securities Lending Facility (“TALF”) would be expanded (up to $1 trillion) in order to reduce credit spreads and restart the securitized credit markets that in recent years supported a substantial portion of lending to households, students, small businesses, and others. Furthermore, the FSP proposed a new framework of governance and oversight to help ensure that banks receiving funds are held responsible for appropriate use of those funds through stronger conditions on lending, dividends and executive compensation along with enhanced reporting to the public.

American Recovery and Reinvestment Act of 2009

On February 17, 2009, the ARRA was signed into law. ARRA is intended to provide tax breaks for individuals and businesses, direct aid to distressed states and individuals, and provide infrastructure spending. In addition, ARRA imposes new executive compensation and expenditure limits on all previous and future TARP recipients and expands the class of employees to whom the limits and restrictions apply. ARRA also provides the opportunity for additional repayment flexibility for existing TARP recipients. Among other things, ARRA prohibits the payment of bonuses, other incentive compensation and severance to certain highly paid employees (except in the form of restricted stock subject to specified limitations and conditions), and requires each TARP recipient to comply with certain other executive compensation related requirements. These provisions modify the executive compensation provisions that were included in EESA, and in most instances apply retroactively for so long as any obligation arising from financial assistance provided to the recipient under TARP remains outstanding.

In addition, ARRA directs the Treasury to review previously-paid bonuses, retention awards and other compensation paid to the senior executive officers and certain other highly-compensated employees of each TARP recipient to determine whether any such payments were excessive, inconsistent with the purposes of ARRA or the TARP, or otherwise contrary to the public interest. If the Treasury determines that any such payments have been made by a TARP

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recipient, the Treasury will seek to negotiate with the TARP recipient and the subject employee for appropriate reimbursements to the U.S. government (not the TARP recipient) with respect to any such compensation or bonuses. ARRA also permits the Treasury, subject to consultation with the appropriate federal banking agency, to allow a TARP recipient to repay any assistance previously provided to such TARP recipient under the TARP, without regard to whether the TARP recipient has replaced such funds from any source, and without regard to any waiting period. Any TARP recipient that repays its TARP assistance pursuant to this provision would no longer be subject to the executive compensation provisions under ARRA.

Homeowner Affordability and Stability Plan

On February 18, 2009, the Treasury announced the Homeowner Affordability and Stability Plan (“HASP”), which proposes to provide refinancing for certain homeowners, to support low mortgage rates by strengthening confidence in Fannie Mae and Freddie Mac, and to establish a Homeowner Stability Initiative to reach at-risk homeowners. Among other things, the Homeowner Stability Initiative would offer monetary incentive to mortgage servicers and mortgage holders for certain modifications of at-risk loans, and would establish an insurance fund designed to reduce foreclosures.

Future Legislation and Regulatory Initiatives

Significant financial institutions reform legislation is currently pending in the Congress and a final bill is expected to be passed during the summer. The Dodd-Frank Act was signed into law on July 21, 2010. Due to the size, scope and lack of history of the Dodd-Frank Act, the future impact of the Dodd-Frank Act on the Bank is unknown. In addition, the Dodd-Frank Act directs certain regulatory agencies, including but not limited to the FDIC, to develop and adopt additional regulation; as such, the ultimate impact of the Dodd-Frank Act on the financial industry is unknown at this time. Due to this uncertainty, the Bank cannot determine the ultimate effect that the Dodd-Frank act may have upon its financial condition or operations.

Effects of Government Monetary Policy

Our earnings and growth are affected not only by general economic conditions, but also by the fiscal and monetary policies of the federal government, particularly the Federal Reserve. The Federal Reserve can and does implement national monetary policy for such purposes as curbing inflation and combating recession. The nature and impact of future changes in monetary policies and their impact on us cannot be predicted with certainty.

MANAGEMENT

Directors and Executive Officers

Our directors and executive officers and those of Citizens Bank of Northern California are as follows:

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Name	Age	Director Since	Position(s Held)

Kenneth E. Baker	68	1995	Director, Chairman of the Board
John T. Casey	72	1995	Director
Charles V. Litton, Jr.	63	1995	Director
Janie L. Marini	61	1995	Director
Wyn G. Spiller	59	2006	Director
Gary N. Tintle	58	1995	Director
Gary D. Gall	59	2009	Director, President, Chief Executive Officer
Reynold C. Johnson, III	59	2010	Director
Kenneth J. Meyers	43	2010	Director
Susann C. Trevena	65		Executive Vice President, Chief Financial Officer
Michael A. Behn	52		Executive Vice President, Chief Information Officer &Senior Credit Administrator
Phillip J. Campbell	50		Executive Vice President, General/Counsel/Chief Risk Officer
Rena L. Rua	49		Assistant Vice President & Corporate Secretary

There are no family relationships among any of our directors and executive officers.

Management Changes

On July 31, 2009, Gary D. Gall, was appointed as President and Chief Executive Office of the Company and the Bank. Mr. Gall’s biography and experiences are set forth in the “Summary.”

In August 2009, Phillip J. Campbell was appointed as Senior Vice President, General Counsel and Chief Risk Officer of the Company. In October 2009, Mr. Campbell was promoted to Executive Vice President. Mr. Campbell’s biography and experiences are in the “Summary.”

In October 2009, the Company promoted Michael A. Behn to Executive Vice President and Senior Credit Administrator. Mr. Behn’s biography and experiences are in the “Summary.”

Ms. Hess’ position as President and Chief Executive Officer and President was terminated on July 31, 2009. She was rehired as Senior Vice President/Chief Banking Officer to perform marketing, client development, and to oversee certain operations of the branch offices. Ms. Hess relinquished all rights under her previous employment agreement and salary continuation agreement.

Mr. Peterson’s position as Executive Vice President and Chief Credit Officer terminated on June 17, 2009. Mr. Peterson relinquished all rights under his previous employment agreement and salary continuation agreement.

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Corporate Governance

Consistent with our perception of good business principles, we have a strong commitment to good corporate governance and to the highest standards of ethical conduct. Additionally, as part of a highly regulated industry, the new corporate governance principles and procedures of the Sarbanes-Oxley Act of 2002, or SOX and the SEC are relatively familiar, even though we are not technically subject to them because we are not “reporting company.” For instance, we believe that at least a majority of our directors have been “independent” at Citizens Bank since its inception in 1995 and that it also has been the case at the Company since it was formed in 2003. We have for some time delegated policy making and oversight functions to committees which also consist of independent directors. We have a formal corporate code of ethics.

Our Board of Directors.Citizens Bancorp is governed by a Board of Directors and various committees of the board that meet throughout the year. We have seven directors each of whom serve for a one year term unless a director resigns or is removed. Directors are elected annually. Directors discharge their responsibilities throughout the year at board and committee meetings and also through telephone contact and other communications with the chairman and chief executive officer and other officers regarding matters of concern and interest to Citizens Bancorp as well as by reviewing materials provided to them. Independent directors meet without any management directors present at least two times each year.

Director Independence. Our objective is that at least a majority of the board consists of independent directors. For a director to be considered independent, the board must determine that the director does not have any material relationship with Citizens Bancorp or its subsidiaries and is otherwise an “independent director” as defined in the NASDAQ listing rules, which we are not subject to but the definitions of which we have adopted for determining the independence of our board. The board has determined that the following eight directors (constituting 88.9% of the entire board) satisfy NASDAQ’s requirements: Messrs. Baker, Casey, Litton, Tintle, Johnson and Meyers, and Ms. Marini and Spiller.

Corporate Governance Guidelines. We expect all of our directors, officers (including our chief executive officer, chief financial officer and principal accounting officer) and employees to adhere to the highest standards of ethics and business conduct with each other, customers, shareholders and communities we serve and to comply with all applicable laws, rules and regulations that govern our business. These principles have long been embodied in our various policies relating to director, officer and employee conduct including such subjects as employment policies, conflicts of interest, professional conduct, and protection of confidential information. Recently, the board has adopted a comprehensive set of corporate governance guidelines to provide a framework for directors and management to effectively pursue our objectives for the benefit of our shareholders.

Committees of the Board. We have an Audit Committee, Loan Committee, Asset/Liability Management Committee and an Executive Committee. We do not have standing nominating or compensation committees. Our Executive Committee is responsible for setting compensation policy and our full board functions as our nominating committee.

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Audit Committee. Directors Litton (Chair), and Ms. Marini & Ms. Spiller.

Although we are not required to comply with the NASDAQ or SEC rules regarding director independence for our Audit Committee members, each member is an “independent director,” as defined by the NASDAQ listing rules and satisfies the additional SEC requirements for independence of Audit Committee members. Our Audit Committee is responsible for assisting the Board of Directors in monitoring the quality and integrity of our financial statements, our compliance with legal and regulatory requirements, and the qualifications, independence and performance of our independent auditors. The Audit Committee reviews the scope and results of audits; determines and reviews accounting policies and practices, the adequacy of the accounting, financial and operating controls; and reviews reports of examination made by regulatory agencies. Our Audit Committee has adopted a charter to provide a framework for effectively performing its functions. The Audit Committee does not currently have a financial expert as defined in the SEC rules.

Loan Committee. Directors Baker (Chair), Casey, Gall and Ms. Marini.

The Loan Committee is responsible for promoting the development, implementation, and maintenance of quality credit policies and procedures; monitoring adherence to credit policies and procedures on an ongoing basis; promoting strong credit culture; monitoring trends in quality and composition of the loan portfolio; and approving changes in Citizens Bank’s Loan Policy. In addition, the Loan Committee oversees the monitoring and activities associated with non-performing assets such as non-accrual loans and real estate owned including but not limited to the foreclosure of loans and liquidation of collateral.

Asset/Liability Management Committee. Directors Casey, Litton, and Tintle (Chair).

The Asset/Liability Management Committee of Citizens Bank of Northern California is responsible for the asset/liability management policy, including monitoring interest rate risk, liquidity management, and investments.

Executive Committee. Directors Baker, Casey, Litton, Marini, Spiller and Tintle.

The Executive Committee is responsible for establishing compensation policy, approving the compensation paid to our executive officers, recommending executive incentive compensation plans and equity-based plans, approving other compensation plans, if any, and reviewing the performance of the President/CEO. ARRA allows certain non-reporting TARP recipients’ Board of Directors to carry out the responsibilities of a Compensation Committee, and to meet at least semiannually to discuss and evaluate employee compensation plans in light of an assessment of any risk posed to the TARP recipient from such plans. The Company’s Board of Directors delegates such responsibilities to the Executive Committee for the purpose of ARRA compliance until the Board establishes a standing Compensation Committee that is composed entirely of independent directors.

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Director Compensation

Annual Retainers

The Chairman of the Board receives an annual retainer of $10,587. Each non-employee director receives an annual retainer of $5,294, except that each non-employee director who is also a member of the Loan Committee receives an annual retainer of $10,587. The Chairs of the Audit, Loan, and Asset/Liability Committees and the Chair of the Executive Committee each receive an annual retainer of $3,176. Those directors who serve on two committees also receive an additional annual retainer of $5,294. Beginning July 1, 2010, no retainers will be paid to directors.

Meetings Fees

In addition to the annual retainer, each director receives $11,116 to cover fees for preparing for and attending Board and committee meetings, whether or not they are able to attend. Beginning July 1, 2010, no meeting fees will be paid to directors.

Deferred Compensation

In 1998 Citizens Bank entered into agreements which permit Kenneth E. Baker, Janie L. Marini and Gary N. Tintle to defer director fees and receive the deferred fees plus accrued interest in monthly payments for fifteen years after retirement. Janie L. Marini has since given the appropriate notice and as of January 1, 2010, she has elected to no longer defer her director’s fees. Effective June 30, 2010, all deferred compensation agreements were terminated.

Retirement Agreements

For retirement after age 75, the Director Retirement Agreements provide an annual benefit for the director’s lifetime equal to $500 multiplied by the number of years of the director’s service, with credit given for service prior to the execution of the agreements. The agreement for the Chairman of the Board provides for an additional benefit of $500 for each year of service as chairman. If a director retires or becomes disabled before age 75, he or she will receive either a lump-sum payment in an amount equal to the retirement liability balance accrued by Citizens Bancorp at the time of early retirement or disability, or he or she will receive monthly payments of that accrued liability amount over 10 years.

Citizens Bancorp has entered into Director Retirement Agreements with Kenneth E. Baker, John T. Casey, Charles V. Litton, Jr., Janie L. Marini, Gary N. Tintle and Wyn G. Spiller and, before their retirement, with retired directors Charles S. Fowler, Rudolf C. Kimmich, Richard A. Malott, B.H. (Bob) Nix, Lowell G. Robinson, Lawrence E. Goodfriend, and Norman A. Kies. Effective June 30, 2010, the agreements with Kenneth E. Baker, John T. Casey, Charles V. Litton, Jr., Janie L. Marini, Gary N. Tintle and Wyn G. Spiller were terminated.

If a change in control of Citizens Bancorp occurs and a director’s service terminates within 12 months after the change in control, the director will receive a lump-sum payment equal to the retirement liability balance accrued by Citizens Bancorp payable to the director for retirement at age 75.

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Executive Compensation

The following table summarizes information about executive compensation paid during the past three years to the Chief Executive Officer and to any executive officer who received salary and bonus in excess of $100,000.


			Summary Compensation Table

			Annual Compensation						Long-Term Compensation


Name and Principal Position	Year	Salary		Bonus(1)		Other Annual Compen-sation (2)		Awards of Securities Underlying Options		All Other Compensation

Gary D. Gall (3)	2009	$	106,090		---	$	2,000		---	$	18,269 (4	)
President and Chief
Executive Officer
Susann C. Trevena	2009	$	160,417		---	$	4,800		---	$	136,454 (5	)
Executive Vice	2008	$	150,000	$	41,940	$	4,800		---	$	120,204 (5	)
President and Chief	2007	$	150,000	$	41,101	$	4,800		---	$	118,537 (5	)
Financial Officer
Michael A. Behn (6)	2009	$	134,620		---	$	4,800		---	$	7,969 (7	)
Executive Vice
President and Chief
Information Officer and
Senior Credit
Administrator
Phillip D. Campbell (8)	2009	$	59,134		---	$	1,865		---		---
Executive Vice
President/General
Counsel/Chief Risk
Officer
Judith Hess (9)	2009	$	155,081		---	$	4,800		---		---
Former President and	2008	$	180,000	$	50,238	$	4,800			$	3,905 (9	)
Chief Executive Officer	2007	$	156,000	$	49,321	$	4,800			$	4,501 (9	)



(1)	Other than the bonus accrued for 2007 that was paid in 2008, no bonus was accrued or paid for 2008 or 2009
(2)	Represents automobile allowances.
(3)	Appointed President/Chief Executive Officer July 2009.
(4)	Represents fees paid while serving in a consulting capacity prior to becoming President & Chief Executive Officer.
(5)	Represents amounts accrued in 2009 pursuant to a salary continuation agreement between Citizens Bank and Ms. Trevena and $4,444 contribution to the profit-sharing plan accrued in 2006 and paid in 2007, and $3,400 contribution to the profit-sharing plan accrued in 2007 and paid in 2008. No profit-sharing contribution was accrued in 2008 or 2009.
(6)	Appointed Executive Vice President October 2009. Mr. Behn was not in an executive role prior to that.
(7)	Represents amount accrued pursuant to a salary continuation agreement between Citizens Bank and Mr. Behn.
(8)	Appointed Executive Vice President/General Counsel/Chief Risk Officer August 2009.
(9)	Ms. Hess’ position as President and Chief Executive Officer was terminated July 31, 2009. She was re-hired as Senior Vice President/Chief Banking Officer. The 2009 salary includes all amounts paid to her in both positions. Other Compensation represents $4,501 contribution to the profit-sharing plan accrued in 2006 and paid in 2007, and $3,905 accrued in 2007 and paid in 2008.

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Option Grants in Last Fiscal Year. There were no grants of options to purchase Citizens Bancorp common stock in the fiscal year ended December 31, 2009.

Option Exercises. The following table sets forth certain information concerning exercises of stock options under our Stock Option Plan by the named executive officer(s) during the year ended December 31, 2009 and stock options held at year-end.

The following table shows the unexercised options held as of December 31, 2009, by two persons named in the Summary Compensation Table above. There are no other options outstanding for those listed in the Summary Compensation Table.


	Number of Securities Underlying Unexercised Options Held at December 31, 2009 (1)

Name	Exercisable	Unexercisable

Susann C. Trevena	24,086		0
Michael A. Behn	3,647		0


(1) Based on the closing price of Citizens Bancorp common stock on December 31, 2009, of $4.00 as reported by QuoteMedia.com, there were no in-the-money options at December 31, 2009 and there were no options exercised in 2009.

1995 Stock Option Plan

The Citizens Bank of Nevada County 1995 Stock Option Plan (the “1995 Plan”) was assumed by Citizens Bancorp in 2003, upon adoption and approval by its directors and shareholders, respectively. The 1995 Plan was originally adopted in May 1995 and had a ten year life. It expired in May 2005, but the holders of options issued under the 1995 Plan have ten years from the date of grant to exercise any options granted under the 1995 Plan.

The 1995 Plan permitted Citizens Bancorp to grant incentive stock options (“ISOs”) within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, to employees (including officers and employee directors) of both Citizens Bancorp and Citizens Bank, and to grant nonstatutory stock options (“NSOs”) to employees (including officers), directors and consultants. As of December 31, 2009, there were 67,082 options granted and still exercisable under the Plan.

2006 Stock Plan

On March 14, 2006, the Board of Directors of Citizens Bancorp adopted a new ten year plan reserving 513,644 shares of common stock for grants of options or shares of restricted stock to officers, employees and directors. The purpose of this plan is to attract, retain and motivate officers, employees and directors whose performance will contribute to the success and growth of Citizens Bank and Citizens Bancorp for the benefit of the shareholders. The 2006 Stock Plan was approved by majority vote of the shareholders on May 16, 2006. Except for 9,922 stock options issued to Judith Hess, which have now been forfeited, no stock options or shares have

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been granted or issued to other employees and directors under the 2006 Stock Plan. As of December 31, 2009, there were no options granted or exercisable under the 2006 Stock Plan.

Profit Sharing 401(k) Plan

The Citizens Bank Profit Sharing 401(k) Plan (the “401(k) Plan”) was originally adopted by the Board of Directors of Citizens Bank and then was assumed by Citizens Bancorp in 2003. The 401(k) Plan, as amended, covers all employees of Citizens Bank and of Citizens Bancorp who have satisfied certain eligibility requirements. The 401(k) Plan is provided to help employees accumulate funds for their retirement on a tax deferred basis. Citizens Bancorp is the Sponsor and Administrator, and TD Ameritrade Trust Company is the Trustee of the 401(k) Plan. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions to the 401(k) Plan by employees or by Citizens Bancorp and income earned on 401(k) Plan contributions are not taxable to employees until withdrawn from the 401(k) Plan, and that contributions by Citizens Bancorp, if any, will be deductible by Citizens Bancorp when made.

Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the statutorily prescribed annual limit and have the amount of such reduction contributed to the 401(k) Plan by Citizens Bancorp on the participants’ behalf. Citizens Bancorp may also contribute an amount to the 401(k) Plan either as a matching or a profit sharing contribution or both. Citizens Bancorp’s contributions to the 401(k) Plan are discretionary and are determined annually by the Board of Directors. Participants’ accounts currently vest 20% after two years, an additional 20% for each year thereafter, and are fully vested after six years. No profit sharing contributions were made for 2008 or 2009.

Participants are eligible for distribution in the event of termination, retirement, death or disability. Participants who have also reached the age of 59-1/2 years and who are fully vested are able to receive a distribution.

Employment and Salary Continuation Agreements

Employment Agreements

To develop and maintain continuity of senior management, Citizens Bank has written agreements defining the rights and responsibilities of its Chief Executive Officer, Gary D. Gall, Chief Financial Officer, Susann C. Trevena, Chief Information Officer/Senior Credit Administrator Michael A. Behn, and General Counsel/Chief Risk Officer Phillip J. Campbell. The contracts are not for a fixed term of employment, but set starting compensation and benefits subject to annual review.

The Company entered an “at-will” employment agreement with Mr. Gall subject to any modifications that may be required by the regulators or that may otherwise be required under applicable laws and regulations. Pursuant to the agreement, Mr. Gall receives a base salary of $250,000 per annum, with no increases for two years and then only upon Bancorp’s compliance with certain conditions. Mr. Gall is eligible to participate in Bancorp’s existing incentive compensation plan. In addition, the Board of Directors has agreed to develop a personal

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incentive compensation program for Mr. Gall from goals established outside the agreement after repayment by Citizens Bancorp of funds received pursuant to TARP and upon compliance with certain other conditions. Mr. Gall will also receive group benefits which are available to all other employees and an automobile allowance. Citizens Bancorp will grant him stock options after TARP funds are returned and upon Bancorp’s compliance with other conditions. Mr. Gall is entitled to severance benefits not to exceed one year of his base annual compensation only after Citizens Bancorp has returned its TARP funds and upon compliance with other specified conditions.

The Company entered an employment agreement with Mr. Campbell which is subject to any modifications that may be required by the regulators or that may otherwise be required under applicable laws and regulations. Pursuant to the agreement, Mr. Campbell’s base salary is $150,000 per annum. He will also receive group benefits which are available to all other employees and an automobile allowance. Subject to the approval of the Board of Directors, Mr. Campbell will be granted the option to purchase 10,000 shares of Company’s common stock subject to Company’s existing stock plan and agreement.

Salary Continuation Agreements

Citizens Bank entered into salary continuation agreements with Susann C. Trevena on January 30, 2002 and on July 1, 2006 for additional benefits, and with Michael A Behn on July 1, 2006. These agreements establish if and when each employee will be entitled to receive compensation after termination of service for various reasons. The agreements provide for annual accrual and vesting of benefits, the payment of which will commence upon the employee reaching Normal Retirement Age, defined in each agreement, or earlier if the employee is disabled or terminated within twelve months of a change in control. No payments are made for unvested benefits or if the termination is for cause. Under these agreements the maximum annual payments will be $75,000 for Trevena and $25,000 for Behn for a period of fifteen (15) years following their Normal Retirement Age. Effective June 30, 2010 the salary continuation agreement entered into with Trevena on January 30, 2002 was terminated, which reduced the maximum annual payments to $45,000 for Trevena. In the event of disability while employed at Citizens Bank prior to the Normal Retirement Age, the employee will receive a benefit equal to the retirement liability balance accrued by Citizens Bank at the time of disability. In the event of early termination, the employee will receive a vested portion of his/her retirement liability. The salary continuation agreements also provide that, in lieu of any other benefit under such agreements, the employee will receive a payment, upon his or her termination within 12 months of a change in control in the Bank, equal to the amount that first triggers an excise tax under the golden parachute payment rules under Internal Revenue Code Section 280G less one dollar, or any other applicable law or regulation. The Executive Committee will review the ARRA requirements and guidelines to be issued by the Treasury and may amend the salary continuation agreements to the extent necessary to comply with applicable ARRA requirements. Benefits under these agreements are substantially equivalent to amounts available under life insurance policies purchased by the Bank on the lives of the executives.

Citizens Bancorp S-1